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Case Against a Canadian Investment Banker Highlights The SEC's Expansive View of Insider Trading

Monday, July 22, 2013
By Greg Kramer and Stephen M. Schultz, Kleinberg, Kaplan, Wolff & Cohen, P.C.

Could a trade based on intuition and observing a chance encounter between a business contact and an executive of a publicly listed company at a charity event result in insider trading charges? The Securities and Exchange Commission's recent enforcement action against Richard Bruce Moore suggests that the answer to that question is yes. The SEC's complaint against Moore, a former investment banker with Canadian Imperial Bank of Commerce (“CIBC”) in Toronto, underscores the SEC's expansive views on materiality and the existence of a fiduciary or fiduciary-like duty in insider trading cases. The SEC accused Moore of using material, non-public information to trade ahead of the 2010 takeover of Tomkins Plc by the Canadian Pension Plan Investment Board (“CPPIB”) and a private equity fund.

The SEC filed a settled insider trading civil action against Moore on April 16, 2013. Without admitting or denying the SEC's substantive allegations, Moore consented to the entry of a proposed final judgment enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 promulgated thereunder and agreed to pay approximately $350,000 in disgorgement of profits and penalties. The final judgment was entered by the district court for the Southern District of New York on April 26, 2013. Moore also agreed to an SEC administrative order that will bar him from the securities industry or participating in penny stock offerings.

The Facts

Neither Moore nor CIBC was involved in the takeover of Tomkins. However, through Moore's employment at CIBC, he knew the managing director at CPPIB (the “Managing Director”) who was running the Tomkins deal. Moore had worked with the Managing Director on other transactions where CPPIB was a CIBC client in the past. Moore and the Managing Director also socialized together. The relevant facts are as follows:

  • Sometime in March 2010, Moore asked the Managing Director how his deals were going. The Managing Director told Moore that he was working on something interesting and active. Moore then inquired about the possibility of assisting as an investment banker on the deal. The Managing Director did not disclose the parties to the deal, but responded that, as far as CBIC participation, they would have to wait and see how it went.
  • In a March 24, 2010, e-mail, Moore asked the Managing Director, “Need any debt on your other deal?” The Managing Director replied by asking, “Would you guys underwrite 2 billion dollars?” Moore responded with an e-mail that stated, “Part yes,” and asked, “In Canada?” In response, the Managing Director e-mailed, “Probably not for you guys this time. You will know why if we do it.”
  • From March through May 2010, the Managing Director devoted nearly all of his time to leading the Tomkins deal, including travelling to the United Kingdom to meet with Tomkins management. Because they continued to communicate regularly, Moore learned that the Managing Director was travelling to London.
  • On the weekend of June 12-13, 2010, Moore and the Managing Director participated in a charity event. During that event, Moore observed a chance encounter between the Managing Director and the chief executive officer of Tomkins. However, the Managing Director declined to introduce Moore to the CEO or to reveal his identity. Later that day another CIBC employee attending the event volunteered the CEO's identity to Moore.
  • Following the charity event, Moore purchased Tomkins' American depository receipts (“ADRs”) which traded on a U.S. stock exchange and Tomkins common shares on a stock exchange outside of the U.S. In July 2010, the Tomkins takeover was publicly announced and, as a result of his prior purchases, Moore realized significant profits.
The SEC's Complaint

According to the SEC, the information described above led Moore to conclude that the Managing Director was likely working on a transaction involving Tomkins. In its complaint, the SEC claimed that the different pieces of information that Moore gleaned from his conversations with and observations of the Managing Director were material and non-public and that he converted that information to his own use in breach of a duty that he owed to CIBC. Had the Moore case been litigated instead of settled, it would not be unreasonable to expect that materiality and breach of duty would have been significant issues of contention.

Here is what may be taken away from the Moore case:

  • It is difficult to predict what information the SEC will consider material. In general, for information to be material there must be a substantial likelihood that the information would be viewed by a reasonable investor as significantly altering the total mix of information available about a security. The pieces of information that Moore learned from his relationship with the Managing Director when looked at separately were all seemingly immaterial. Even when looked at collectively, reasonable arguments could be made that the information was conjecture. Indeed, in Moore's settlement agreement with the Ontario Securities Commission (“OSC”) for related Canadian charges involving Moore's trading in Tomkins stock, the OSC notes that at no time did the Managing Director provide Moore with “any material, generally undisclosed information.”1
  • The SEC may take an expansive view of the duty requirement under the so-called “misappropriation theory” of insider trading. Under the misappropriation theory, a person is liable for insider trading when he or she trades while in possession of material, non-public information in violation of a fiduciary-like duty of trust or confidence to the source of the information. In this case, the SEC claimed that Moore breached a duty to CIBC when he used the information to trade. The SEC's position suggests that Moore owed a duty of trust and confidence to CIBC with respect to any information that he learned about a CIBC client even though CIBC was not representing the client on the specific matter and even though some of the information may have been learned in a personal capacity and not as an employee of CIBC. Nowhere did the SEC allege that CIBC owed a duty to CPPIB with respect to the information or that the Managing Director expected Moore to keep the information confidential.
  • The Moore case illustrates the limits of the “mosaic theory.” Under the mosaic theory investors can assemble many different pieces of information, which may include both publically available information and immaterial non-public information that may be confidential, into a mosaic that provides the investor with a material insight into a security that is not known to the market in general. The Moore case suggests that if all of the immaterial, non-public information in a mosaic was obtained as a result of a breach of duty, then the “mosaic theory” may not be available as a defense to insider trading.
  • The SEC's decision to bring an enforcement action against Moore may have been influenced by the fact that Moore engaged in other misconduct in 2012 while working as an investment banker at UBS in Toronto. In the related OSC enforcement action referred to above, Moore was also charged with illegally trading in the stock of HOMEQ Corporation after a UBS client inadvertently sent Moore material, non-public information about a transaction with HOMEQ Corporation. Moore's trading in HOMEQ stock was in violation of the Ontario Securities Act.
  • Notwithstanding that the SEC may have been influenced by Moore's other misconduct, the Moore case highlights that the SEC continues to aggressively pursue insider trading cases, including cases that do not follow “typical” insider trading fact patterns. The SEC may not be willing to give defendants the benefit of the doubt in “close call” situations and questions of materiality and duty will be decided in courts to the extent that the defendants challenge the SEC's charges.

Greg Kramer is a partner in the corporate and securities practice areas of Kleinberg, Kaplan, Wolff & Cohen, P.C. He has extensive experience advising clients in connection with trading and compliance issues. He can be reached at gkramer@kkwc.com or 212-880-9831.

Stephen M. Schultz is a partner in the corporate and securities practice areas of Kleinberg, Kaplan, Wolff & Cohen, P.C. He focuses on counseling clients in the investment management and financial services businesses. He can be reached at sschultz@kkwc.com or 212-880-9840.

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