Securities & Exchange Commission v. Tome
638 F. Supp. 596 (1986)
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Rule of Law:
An individual who misappropriates material, non-public information for personal financial gain, in breach of a fiduciary or similar duty of trust and confidence owed to the source of the information, violates Section 10(b) of the Securities Exchange Act and Rule 10b-5.
Facts:
- Edgar Bronfman, the CEO of Joseph E. Seagram & Co. ('Seagram'), developed a close personal and professional relationship with Giuseppe B. Tome, an international investment advisor.
- In October 1980, Seagram formally retained Tome's firm, Finvest Geneva, as an investment consultant, and Bronfman began confiding in Tome about Seagram's confidential plans to acquire another company.
- Bronfman shared material, non-public information with Tome about Seagram's potential acquisition targets, which were eventually narrowed down to St. Joe Minerals Corporation ('St. Joe').
- Tome was aware that by early March 1981, St. Joe was Seagram's sole remaining target for a hostile tender offer.
- On March 9, 1981, Tome learned from Bronfman that Bronfman was traveling to Montreal for a Seagram Board of Directors meeting, indicating imminent corporate action.
- On March 10, 1981, the day before Seagram publicly announced its tender offer for St. Joe, Tome placed massive orders for St. Joe common stock and call options for accounts he beneficially owned or controlled.
- Tome also tipped several clients and business associates, including Paolo Leati of Lombardfin S.p.A., who then also purchased large quantities of St. Joe securities based on Tome's tip.
- When later confronted by Bronfman about the trading activity, Tome repeatedly lied, falsely denying that he had purchased any St. Joe securities or had any beneficial interest in such trades.
Procedural Posture:
- The Securities and Exchange Commission (SEC) brought a civil action in the U.S. District Court for the Southern District of New York.
- The initial complaint named 'Unknown Purchasers' as defendants because the identities of the foreign traders were not immediately known.
- The SEC later amended the complaint to name Giuseppe B. Tome, Paolo Mario Leati, Lombardfin S.p.A., and several Panamanian corporations as defendants.
- Tome, though represented by counsel, refused to answer interrogatories related to the transactions, asserting his Fifth Amendment privilege against self-incrimination.
- Defendants Leati and Lombardfin S.p.A. failed to appear in the action and were held in default.
- The case proceeded to a bench trial before the District Court.
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Issue:
Does an individual violate Section 10(b) and Rule 10b-5 by trading on material, non-public information about a tender offer that was obtained in breach of a fiduciary duty of trust and confidence owed to the acquiring company, which was the source of the information?
Opinions:
Majority - Judge Milton Pollack
Yes. An individual commits fraud in violation of Section 10(b) and Rule 10b-5 by misappropriating and trading on material, non-public information obtained in breach of a fiduciary or similar duty of trust and confidence owed to the source of that information. The court held that through his close personal and professional relationship with Bronfman and his consulting agreement with Seagram, Tome became a 'temporary insider' of Seagram. This position created a fiduciary duty to keep Seagram's information about its acquisition plans confidential. Tome breached this duty when he misappropriated the information about the impending St. Joe tender offer for his own benefit and for the benefit of his tippees. This breach of duty to Seagram, the source of the information and the tender offeror, constituted a fraudulent device 'in connection with the purchase or sale of any security,' thereby satisfying the requirements of Rule 10b-5. The court found clear evidence of scienter in Tome's frantic trading, his subsequent lies to conceal his actions, and his flight from the United States. The information was undeniably material, as evidenced by the dramatic increase in St. Joe's stock price following the public announcement.
Analysis:
This case is a foundational application of the 'misappropriation theory' of insider trading liability, significantly expanding the scope of Rule 10b-5. The decision establishes that a person can be liable for insider trading by breaching a duty of confidentiality to the source of the information, even if that source is not the company whose securities are being traded. This moves beyond the 'classical theory,' which limited liability to corporate insiders who owed a duty to their own company's shareholders. By holding an outside consultant liable for defrauding his client (the acquiring company), the court affirmed that the antifraud provisions protect the integrity of the market from any abuse of a confidential relationship for personal gain, a principle later affirmed by the Supreme Court.
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