United States v. Mylett
97 F.3d 663, 1996 WL 563041, 1996 U.S. App. LEXIS 26113 (1996)
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Rule of Law:
An insider's confirmation of public speculation, when based on specific, non-public facts, can constitute material non-public information for the purposes of insider trading liability under the misappropriation theory, even if the insider's conclusion is an inference rather than direct knowledge of a final corporate decision.
Facts:
- On November 8, 1990, The Wall Street Journal published an article speculating that AT&T and NCR Corporation were discussing a business combination, but noted the talks might fail.
- Charles Brumfield, a Vice President at AT&T, had previously conducted a confidential feasibility study for a merger with an unnamed company that had the same vital statistics as NCR.
- After seeing the article, Brumfield's supervisor specifically and unusually warned him not to discuss it.
- On the same day, Brumfield called his friend, Joseph Cusimano, and told him he believed the article's contents were true and that 'AT&T was going to be attempting to acquire NCR.'
- Following the call, Cusimano purchased NCR securities on November 9 and November 12, 1990.
- On December 2, 1990, AT&T publicly announced its offer to acquire NCR.
- On December 3, 1990, the stock of NCR increased substantially in value.
Procedural Posture:
- Joseph Cusimano pleaded guilty in the U.S. District Court for the Southern District of New York to insider trading for purchases made between November 15-20, 1990.
- The district court, in a subsequent opinion, held that Cusimano's earlier trades from November 9 and 12 should also be included when calculating his offense level and fine.
- The district court also enhanced Cusimano's sentence for obstruction of justice through perjury.
- Cusimano (appellant) appealed the final judgment and sentence to the United States Court of Appeals for the Second Circuit.
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Issue:
Does an insider's tip, which confirms public speculation about a potential merger and is based on non-public details that increase the certainty of the event, constitute material, non-public information sufficient to support an insider trading conviction under the misappropriation theory of Rule 10b-5?
Opinions:
Majority - Calabresi, J.
Yes. An insider's tip confirming public speculation constitutes material non-public information when it is based on non-public details that make the event more certain. The court reasoned that Brumfield's tip was 'substantially more specific' and 'more certain' than the public rumors because it was based on non-public facts, namely his feasibility study and his supervisor's unusual warning. Applying the materiality test from Basic Inc. v. Levinson, the court found the information material by balancing the high probability of the event (indicated by AT&T's internal preparations) and the high magnitude of the event (a $6 billion acquisition). The information was misappropriated because Cusimano knew his source, Brumfield, was a corporate insider breaching a fiduciary duty of confidence to AT&T.
Dissenting in part - Meskill, J.
No. The insider's tip did not constitute material, non-public information for the trades on November 9 and 12. The dissent argued that while some of the information Brumfield relayed was material and some was non-public, none of it was both. At the time of the tip, AT&T had not made a final decision to pursue the acquisition, making Brumfield's statement a prediction based on 'thoroughly inconclusive information.' The majority's holding, therefore, improperly criminalizes trading based on an insider's accurate but speculative guess, rather than on information that was actually concrete and factual at the time it was conveyed.
Analysis:
This decision clarifies that 'non-public information' under Rule 10b-5 is not limited to concrete, undisclosed corporate facts. It can include an insider's analysis or confirmation of public rumors, provided that confirmation is based on confidential knowledge that lends it a degree of certainty unavailable to the public. The case broadens the scope of potential insider trading liability by affirming that even pieced-together inferences can be illegal tips if they give a trader a significant edge. This puts corporate insiders on notice that even their qualified beliefs, if shared and based on their position, can lead to liability for themselves and their tippees.
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