(The article featured below is a selection from Federal Securities Law Reporter, which is available to subscribers of that publication.)

Evidence Failed to Show Acceptance of Duty of Confidentiality

A district court (SD NY) denied cross-motions for summary judgment on insider trading and securities fraud claims. The SEC brought this action against seven hedge funds and related companies and the individual serving as their managing partner and chief investment officer. The action arose from the funds' involvement in a series of Private Investments in Public Equities (PIPE) and their contemporaneous trading in the stock of the issuing entities. According to the Commission, the funds committed insider trading and violated duties of confidentiality by shorting the stock of four companies based on confidential, nonpublic information that companies intended to issue PIPEs.

Both parties agreed that the funds had information regarding the offerings and the issuers, that the information included language relating to confidentiality and that the funds contemporaneously traded the stock of the issuing companies. The parties disagreed, however, about whether the funds had and accepted a duty of confidentiality to the issuers. The court concluded that summary judgment would be inappropriate because material facts remained in dispute. While the court found that the information possessed by the funds was both material and nonpublic, the evidence offered by the Commission was insufficient to establish conclusively that the funds accepted a duty of confidentiality. "A reasonable juror," stated the court, "could conclude defendants never saw or accepted the confidentiality language."

At the same time, the court found that the funds could not establish as a matter of law the absence of a duty of confidentiality because of evidence describing the companies' confidentiality procedures and the funds' course of conduct. Regarding whether trades were made on the basis of the material nonpublic information, the funds were unable to establish that the trading in question was part of a "pre-existing trading plan" under Rule 10b5-1 because they did not show any existing plan or strategy. Furthermore, the trades in question, which occurred over a two-week period, were "insufficient to establish a history or practice of regular trading that might provide an innocent explanation." Also, the fact that the funds held both short and long positions did not by itself establish that they received no financial benefit from the information. Finally, the court rejected the managing partner's claim that he had no personal knowledge of any duty of confidentiality. According to the court, the record contained direct and circumstantial evidence that the partner was aware of and breached duties owed to the issuers.