The War On Insider Trading Continues — Two More SEC Cases

On Wednesday, the campaign on insider trading continued with two more insider trading cases being filed. One case is a settled action brought against an attorney. A second named the Chief Executive Officer of a medical instrumentation company, who did not settle, and his alleged tippee, the father of a co-worker, who did settle.

In SEC v. Myers, Civil Action No. 08-CV-5109 (S.D.N.Y June 4, 2008), the Commission filed a settled insider trading case against attorney Jeffrey Myers of Cranberry Township, Pennsylvania. According to the complaint, Mr. Myers knew a member of the board of directors of NSD, a takeover target. NSD’s board had received four takeover bids. One offer was from FNB Corp. for $40 per share. Mr. Myers and the NSD board member (who later passed away) were business associates. Following a meeting between the two, Mr. Myers purchased 1,000 shares of NSD stock. Approximately one month later, a merger between FNB and NSD was announced.

To settle the action, Mr. Myers consented to the entry of a final judgment permanently enjoining him from future violations of Section 10(b) and Rule 10b-5. He also consented to the entry of an order requiring him to pay disgorgement and prejudgment interest totaling $13,705 and a one-time civil penalty of $10,939.

In SEC v. Fontanetta, Civil Action No. 08-CV-5110 (S.D.N.Y. June 4, 2008), the Commission brought an insider trading action against Joseph Fonanetta, the Chief Executive Officer and a board member of a privately held Diopsys, Inc., and Burr McKeehan, a retired podiatrist and an original investor in Animas when it was formed in 1996.

According to the complaint, Animas Corporation was being acquired by Johnson & Johnson. Prior to the announcement, Mr. Fontanetta was told about the merger from another member of his board of directors, who had learned about the transaction from his wife, an Animas executive. Subsequently, Mr. Fonanetta tipped Burr McKeehan after first discussing the matter with Mr. McKeehan’s daughter, a Diopsys executive with whom he had been working. Mr. McKeehan purchased 30,000 shares of Animas stock prior to the merger and after his conversation with Mr. Fonanetta.

Mr. McKeehan resolved the action by consenting to the entry of a permanent injunction as well as an order requiring him to disgorge his trading profits and prejudgment interest and pay a civil fine in an equal amount. The action is still pending as to Mr. Fontanetta.

SECURITIES CLASS ACTIONS: EMERGING TRENDS AND ISSUES – A NEW SERIES

Today, we begin a new occasional series focused on current and emerging trends and issues in private securities damage actions, typically securities class actions.

Congress and the courts have struggled for years with the role and scope of securities class actions. Congress, for example, sought to rein these actions in when it passed the Private Securities Litigation Reform Act (PSLRA) in 1995. There, Congress imposed a series of substantive and procedural limitations on these cases after hearing testimony about abuses in bringing, maintaining and settling these actions. That testimony suggested that the merits are not relevant, only the potential liability from huge damage claims. See, e.g., Janet Cooper Alexander, Do The Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497 (1991) (cited in the legislative history). Three years later, Congress reinforced the limitations of the PSLRA with the Securities Litigation Uniform Standards Act (“SLUSA”).

As early as 1975, the Supreme Court decried what it called the “ most vexatious” nature of these cases. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). In the years that followed, the Court has handed down a number of decisions imposing limitations on securities class actions. See, e.g., Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005) (requiring loss causation); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct 761 (Jan. 15, 2008) (rejecting “scheme liability”). Those rulings are consistent with the PSLRA and SLUSA.

Recently even the Securities and Exchange Commission (“SEC”) seems to have conflicting views about cases it typically supports. Last year, it adopted a pro-defendant/business position in one important securities class action before the High Court (Tellabs), but sought to take a pro-plaintiff position in another later in the term (Stoneridge discussed here).

At the same time, Congress has acknowledged that securities class actions play an important role as an adjunct to the SEC’s market policing efforts. This thread runs through the PSLRA, which sought only to weed out suits which lack merit while permitting meritorious cases to proceed. See, e.g., Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007). The courts have adopted a similar position. And, the SEC frequently argues that private damage actions are a necessary supplement to its enforcement efforts.

To analyze the impact of these conflicting trends, examine emerging issues in this area and perhaps determine whether the merits do now matter this series will consider three broad areas:

1) An overview – a review and analysis of various statistics such as the number of filings, amount of settlements and similar matters;

2) The impact of recent key Supreme Court decisions; and

3) Trends in key lower court cases.

Next: Part I: The Statistics.