The opinion of the court was delivered by: POLLACK
POLLACK, Senior District Judge:
This is a civil insider trading liability action, brought by the Securities and Exchange Commission ("SEC"), authorized by Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78u(d), seeking an injunction and other ancillary relief, including disgorgement of ill-gotten gains, against defendants based on defendants' violations of the antifraud provisions of the securities laws and regulations. Subject-matter jurisdiction is posited on Sections 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(e) and 78aa.
This action arises from the defendants' purchases of call options on the common stock of St. Joe Minerals Corporation ("St. Joe"), as well as of the stock itself, on March 10, 1981, the day immediately prior to the announcement by Joseph E. Seagram & Company of a hostile tender offer for all of the outstanding common stock of St. Joe. The issues were presented to the Court at a Bench trial.
The case reveals a crass abuse and betrayal of a personal and professional relationship of trust and confidence for personal gain. The principal defendant, Tome, exploited his confidential relationship with Seagram and with its Chairman of the Board and Chief Executive Officer, Edgar Bronfman, to obtain and misuse nonpublic information of Seagram's preparations to bid for control of St. Joe at $45 per share of common stock. Acting a day ahead of the announcement of that bid, on March 10, 1981, Tome positioned himself and his tippees to garner millions of dollars in unlawful gains by purchasing vast quantities of call options on St. Joe stock, and the stock itself, which was trading at about $30 per share, from unsuspecting sellers while Seagram was putting the finishing touches on the as-yet unannounced bid. Within days after the March 11th announcement of the hostile tender offer, which sent the St. Joe stock up to over $45 per share and sky-rocketed the options accordingly, Tome and his tippees cashed in on their St. Joe call options and common stock. Tome fraudulently concealed his misappropriation of this confidential corporate information and his breach of the confidential relationship from Bronfman and from Seagram, falsely denying that he had made any St. Joe purchases and falsely denying any participation in the market when confronted and questioned specifically by Bronfman. As his identity in the illegal conduct came to light through a prompt SEC investigation, Tome fled this country and has remained abroad since. His conduct, and that of his cohorts, was meticulously pieced together by the SEC, resulting in this suit.
A. Identity and Interrelationship of Defendants
Those involved in the misconduct complained of form an intricate international web which needs to be detailed in order to understand its ramifications.
Giuseppe B. Tome ("Tome") is an Italian national who resides in Switzerland.
He first became involved in the securities industry in 1959 as a Registered Representative in the Milan, Italy office of Bache & Co. ("Bache"). Through the years, Tome was promoted within the Bache organization, eventually becoming Chairman of Bache & Co. (Overseas) S.A., located in Geneva, Switzerland. Tome left Bache in 1973 for a position as Vice President of E.F. Hutton & Company, Inc. ("Hutton"). At Hutton, Tome was involved with their international division, eventually managing several hundred registered representatives located in twenty-two offices worldwide. When he resigned from Hutton on February 3, 1979, Tome was President of E.F. Hutton International, S.A., and was on the Board of Directors of Hutton.
[Agreed Findings ("AF") l, 2].
Sometime after leaving Hutton in 1979, Tome formed Compagnie Pour le Financement et l'Investissement, S.A. ("Finvest Geneva"), a securities firm headquartered in Geneva, Switzerland, of which he is the President and Chief Executive Officer. [AF 2(a), 20]. Finvest Geneva is controlled by, and is part of, a larger holding company, Infinvest Holdings, N.V., a Netherland Antilles corporation. See infra note 5.
In order to execute securities trades on the United States Exchanges, Tome was also a registered representative from January 1980 until June 30, 1981, with Baird-Patrick & Co., Inc. ("Baird-Patrick"), a United States broker-dealer.
[AF 2(c)]. Tome forwarded, and sometimes himself initiated, orders to buy or sell securities traded on U.S. exchanges, primarily the New York Stock Exchange, for the accounts of his clients, or for companies affiliated with Finvest Geneva, to Baird-Patrick for execution.
Tome regularly visited the United States for periods of time for business and social reasons; in early April 1981, however, he left the United States abruptly,
missing a scheduled business meeting on April 9, 1981. [Bronfman Tr. 133-34.] Tome was indicted in New York on August 7, 1984, charged with criminal violation of the securities laws. He has not been in the United States since 1981 and did not return to face the criminal charges. Although represented by counsel in this case, he refused to answer any interrogatories related to the transactions involved herein on the ground of the Fifth Amendment privilege against self-incrimination. [Ex. 100].
Although not technically a defendant in this action, Finvest Geneva is discussed here next, both for purposes of clarity, and because of Tome's proprietary interest in and his use of Finvest Geneva in the matters involved herein.
Finvest Geneva belongs to a group of related enterprises (the "Finvest Group")
that, through Tome's design, were represented to potential clients as engaging in securities and commodities brokeraging, in trading and underwriting, Eurobond transactions, currency management, portfolio management, as well as in investment banking. [Ex. 3; Csopey Tr. 31].
Finvest Geneva itself was founded by Tome in 1979; [AF 2(a)] Tome is its majority shareholder and two banks, Banque Privee and Compagnie de Banque et D'Investissement ("CBI"), are minority shareholders. [Manzoni Tr. 24; Pignatelli Tr. 61-62; Franko Tr. 44; Cheneviere Tr. 81; Ex. D (World Business Weekly August 4, 1980)]. Finvest Geneva's clients comprise Swiss banks, persons with accounts in Swiss banks, and depositors of Swiss banks. [AF 2(b)]. Finvest Geneva managed portfolios for approximately 25-30 clients. [Pignatelli Tr. 63]. Finvest Geneva was run from day to day by Tome, and when he was not there, by either of two other employees, Mr. Del Pozzo or Mr. Bulletti.
[Manzoni Tr. 38, 46, 66-67].
Finvest Geneva had discretionary authority over at least some of its clients' accounts. [Manzoni Tr. 28; Pignatelli Tr. 56]. The only persons exercising discretion over client's accounts, however, were Tome and, to a lesser extent, Del Pozzo and Bulletti.
[Manzoni Tr. 38, 46, 66-67]. Thus, without the client's advance knowledge, Tome would often buy and sell stock and/or options for a particular client's account.
a holding company for various subsidiaries and affiliates, engaged primarily in securities and currency brokeraging, was formed in 1974 by Paolo Mario Leati ("Leati") and Dionisio G. Csopey ("Csopey"). [Csopey Tr. 5]. Lombardfin S.p.A. and Finvest Geneva had a close working relationship because of Leati's relationship with Tome. In fact, Lombardfin S.p.A.'s two principal foreign affiliates were renting their only office space from Finvest Geneva.
Conversely, Tome often visited the Milan office of Lombardfin S.p.A.'s domestic subsidiary and used its facilities (e.g., telephone, telex machine, quotation machine) to conduct his business. [Csopey Tr. 94-95]. In addition, Lombardfin Securities Underwriters, a Lombardfin S.p.A. 100% owned affiliate, executed trades in the Eurobond market on Finvest Geneva's behalf because Finvest Geneva did not have the capacity to clear trades. [Csopey Tr. 31-32]. Finvest Geneva had a securities trading account with Lombardfin Securities Underwriters, Ltd., which was opened on or about September 28, 1979. [Ex. 913].
Leati is an Italian national residing in Italy. In 1974, he and Csopey left their employment at Merrill Lynch, Pierce, Fenner & Smith, and formed Lombardfin S.p.A., as a joint stock company. [Csopey Tr. 5]. In 1980-81, Leati was the majority shareholder (60-75%) in Lombardfin S.p.A. Csopey (12.5%) and Fiduciaria di Investimenti, a company, were the minority shareholders. [Csopey Tr. 19-20 & corrections]. Csopey was not named as a defendant in this action.
Leati was the decision-maker for Lombardfin S.p.A. and its subsidiaries. [Csopey Tr. 16]. He had discretion over accounts of many Lombardfin S.p.A. clients and thus could, and often did, trade shares and/or options for a client's account without that client's advance knowledge or specific approval. [Csopey Tr. 44-48, 123, 127].
Banca Della Svizzera Italiana ("BSI") is a Swiss banking institution with principal offices in Lugano, Switzerland. [AF 14]. It maintains securities trading accounts for customers. It acted for Tome's interests and the accounts of the so-called Panamanian defendants, i.e., NICO, TFCO, and Finvest Panama, discussed next.
To acquire the St. Joe securities he purchased directly on March 10, 1981, Tome used the brokerage trading accounts maintained at BSI for three Panamanian entities in which Tome had a beneficial interest, namely NICO, TFCO, and Finvest Panama.
The first of these BSI accounts, Nayarit Investments, S.A. ("NICO"), is a Panamanian company which was formed on or about May 31, 1978. [AF 8, 9]. NICO's principal line of business is the management and administration of assets deposited in bank accounts. [AF 9(a)]. Tome provided NICO with investment advisory and management services [AF 9(k)], for which no fees were paid to Tome. [NICO Answers To Interrog. 4B]. Tome was a beneficial owner of and held discretionary authority and a power of attorney over the NICO account. [AF 9, 9(b), 10].
The second of these trading accounts at BSI, Trasatlantic Financial Co., S.A. ("TFCO"), is a Panamanian company which was formed on or about March 25, 1980. [AF 4, 5]. TFCO's principal line of business is the management and administration of assets deposited in bank accounts. [AF 5(a)]. Here again, Tome provided TFCO with investment and advisory services, [AF 5(k)] without fee. [TFCO Answers To Interrog. 4B]. Tome was a beneficial owner of the TFCO account and held discretionary power over it.
The third of the trading accounts at BSI, [AF 12], Finvest Underwriters and Dealers Corp. ("Finvest Panama"), is a Panamanian corporation that was formed on or about June 26, 1979. [AF 11]. Tome has been a beneficial owner of the Finvest Panama account with BSI and has had discretionary power over it. See supra note 10.
As noted previously, see supra note 5, Finvest Panama is a wholly owned subsidiary of Infinvest Holdings, N.V. (i.e., the Finvest Group), and thus is directly related to Finvest Geneva, and thus to Tome.
B. The Confidential Relationship
At the base of this suit, we find a personal acquaintance that flowered and bloomed into an intimate friendship and a professional association in which trust and confidence were reposed in Tome, of which he callously took shoddy and unlawful advantage.
Edgar M. Bronfman ("Bronfman") is the Chairman of the Board and Chief Executive Officer of Joseph E. Seagram & Co. ("Seagram"), an Indiana corporation, and of its parent corporation, Seagram Company Ltd., a Canadian corporation. [AF 18, 19; Bronf Tr. 7].
Bronfman met Tome in July 1980 when they flew together, as part of a group of fourteen people, on the Seagram Company airplane to Cheyenne, Wyoming to attend a rodeo. [AF 38(2)]. Bronfman's wife had met Tome and his wife earlier that month. [Bronf Tr. 28-29]. The Tomes promptly ingratiated themselves, resulting in an invitation to accompany the Bronfmans on the trip to help Mrs. Bronfman celebrate her birthday. [Bronf. Tr. 28].
Using his opportunity on the airplane, Tome turned to financial matters and discussed currencies with Bronfman. [Bronf. Tr. 11]. Using a reprint of an article written about him that he happened to have handy, Tome showed Bronfman his oft-repeated "insight" that any American corporation keeping all its accounts in U.S. dollars is thereby "going short" on other currencies. [Bronf. Tr. 11]
Within weeks of this enticing initial discussion, Bronfman introduced Tome to Harold Fieldsteel, Seagram's chief financial officer. [AF 38(3)]. In a memorandum to Fieldsteel, dated August 5, 1980, immediately prior to a meeting between Tome and Seagram's officers on the topic of Seagram's currency position, Bronfman stated that Tome's "record warrants our taking a serious look at his firm's [ i.e., Finvest Geneva's] capabilities," and that Bronfman was "not at all interested in any defensive attitude on [Seagram's] part." [Ex. F].
After the initial associations, Tome moved in on the Bronfmans and intensified the social relationship and his business approach.
In October 1980, through Tome's efforts, Finvest Geneva obtained as a major client Seagram with which it signed two agreements. On October 2, 1980, Tome, acting for Finvest Geneva, signed a "Foreign Exchange Advisory Agreement" with Seagram under which, in exchange for $100,000 annually (later reduced to $50,000), Finvest Geneva agreed to provide Seagram with information and advice regarding world currencies and to form for it a foreign exchange advisory committee, the members of which were to be selected by Finvest Geneva with Seagram's approval. [Ex. 5]. On October 8, 1980, Tome, acting for Finvest Geneva, entered into an "Investment Management Agreement" with Seagram under which Finvest Geneva was given discretion to invest ten million dollars of Seagram's money in various currencies, bonds and notes, and to exchange it from one currency to another. [Ex. 6]. As a management fee, Finvest Geneva would receive one-eighth of 1%, per quarter, of the average amount of funds held in the Seagram account. [Ex. 6].
Although not memorialized as a "formal" relationship, but clearly indicated by subsequent conduct, Bronfman, in his own words, "consider[ed Tome] sort of a European consultant to Seagram generally." [Bronf. Tr. 15]. It was in the context of the actual relationship that Bronfman conveyed to Tome a stream of material non-public information concerning Seagram's acquisition plans. [Bronf. Tr. 50]. Tome seized and actively solicited and nurtured this confidentiality, frequently probing into the internal reasons for Seagram's actions, asking Bronfman "why?" [Bronf. Tr. 44]. Bronfman, on the other hand, states that he sought Tome's insight into "how the European investment community would look at Seagram if [it] made such an acquisition." [Bronf. Tr. 44]. Unquestionably, Tome was Bronfman's friend and advisor, had formal contractual relationships with Seagram, through Finvest Geneva, and had vast experience in the securities industry;
clearly, Tome was looked upon and treated by Bronfman as an insider of Seagram, as he had become.
In his personal finances as well, Bronfman trusted and confided in Tome. Bronfman opened a personal account with Finvest Geneva for trading in commodity futures and currencies; [Bronf. Tr. 16] he gave Tome a power of attorney and discretion over his personal account. [Bronf. Tr. 16]. Bronfman consulted with Tome "as an advisor [for] general business purposes." [Bronf. Tr. 16]. This advisory function led to a "joint venture" between Bronfman and Tome, on behalf of NICO, as investors in the Broadway musical "Sophisticated Ladies." [Bronf. Tr. 75-77]. In fact, Bronfman even replaced with his own money a $5,000 bounced check that Tome issued to the "Sophisticated Ladies" partnership on behalf of NICO. [Ex. 18]. On another occasion, Tome suggested a "joint venture" to Bronfman whereby they would buy a block of stock in the Bache securities firm. [Bronf. 126].
Underlying and encouraging these confidential and business relationships, both Seagram-related and personal, between Bronfman and Tome were a pervasive series of social contacts. After initially meeting Tome on the plane trip for Bronfman's wife's birthday, Bronfman saw Tome regularly, approximately a dozen times, until April 1981 and exchanged telephone calls from time to time. [Bronf. Tr. 19-20].
Given the brief period of time they had known each other, Bronfman and Tome's close social contacts were extensive and significant, giving Tome the access to Bronfman and thus to Seagram that he promoted. In November 1980, Bronfman, his wife, and another couple spent a weekend with Tome in Mageve, France at Tome's ski lodge. [Bronf. Tr. 20, 33]. On that same trip, Bronfman and his wife were personal guests at Tome's house in Geneva, Switzerland, at a dinner party. [Bronf. Tr. 29]. In December 1980, Tome visited Bronfman and his wife during hunting season at their home in Charlottesville, Virginia. [Bronf. Tr. 44]. Bronfman and his wife spent the Christmas and New Year's holidays in 1980-81 with Tome and his wife on a boat off Mexico. [Bronf. Tr. 30].
C. Seagram's Acquisition Plans
In August 1980, just after Bronfman met Tome, Seagram sold its interest in Texas Pacific Oil Company for $2.3 billion dollars. [Bronf Tr. 8]. With this tremendous cash reserve, Seagram began looking at companies for purposes of finding an acquisition candidate. Seagram set up an acquisition committee, [Bronf. Tr. 36-37], lined up a $3 billion dollar line of credit (that was available after November 1980),
[Bronf. Tr. 35-36], and hired Arthur D. Little & Company to do a macro study of how the world would change in the next twenty to thirty years, and thus where the best business opportunities lay. [Bronf. Tr. 38]. Bronfman was "fascinated" with coal as the primary source of energy after oil in the next 20-30 years and began to look at companies that had coal assets, particularly Santa Fe, Amax, St. Joe, and Union Pacific.
[Bronf. Tr. 38-39].
In late 1980, Tome requested that Seagram provide him with a general briefing on its policies, operations, and financials, and he informed Seagram that he was interested in discussing with them Seagram's use of the proceeds it had obtained from the Texas Pacific Oil sale. [Ex. 25]. The data was provided to him, [Ex. 26], and Bronfman spoke with Tome as a consultant to Seagram about its acquisition and hostile tender offer plans.
Sometime during the Fall of 1980, Seagram considered purchasing up to twenty percent of the outstanding shares of Texaco.
Bronfman testified that Seagram "proceeded and got pretty close to actually making a tender" for Texaco. [Bronf. Tr. 41-42]. Around December 10, 1980, Bronfman decided that Seagram would not proceed with the Texaco tender.
[Bronf. Tr. 42].
Immediately after deciding not to proceed with the Texaco stock purchase, Bronfman (and his investment bankers and acquisition committee) "started to focus on Santa Fe Industries." [Bronf. Tr. 42]. In mid-December, while Tome visited Bronfman at his house in Charlottesville, Virginia during hunting season, Bronfman discussed Seagram's acquisition plans with Tome in an attempt to determine "how the European investment community would look at Seagram if [it] made such an acquisition": [Bronf. Tr. 44]
And he [Tome] asked, you know, had we gotten any closer to making any decision as to what we [Seagram] were going to do [about an acquisition] and I [Bronfman] said, yes I think we are looking very hard at Santa Fe. And we discussed it in general. He wanted to know why. I told him about the kind of asset play that it represented. (emphasis added).
Tome probed further, asking Bronfman " when do you think?" (emphasis added). [Bronf. Tr. 47]. Bronfman told him that it might take another couple of months, [Bronf. Tr. 47], and that the investment banking firms of Goldman, Sachs, and Lazard Freres were advising Seagram on the matter. [Bronf. Tr. 48].
Tome and Bronfman "didn't just discuss Santa Fe, but companies like Santa Fe."
[Bronf. Tr. 44]. The coal resource companies that Bronfman had on his short list at the time were Santa Fe, Amax, and St. Joe.
During this mid-December conversation, Bronfman did not consider it necessary to caution Tome that the information Bronfman was giving him was confidential because:
I [Bronfman] didn't think it was necessary. . . . [because of Tome's] 20 years in this business. He ought to know the rules. I assume he does know the rules. . . . [The rules are] that basically [what I told him] was inside information[;] . . . yes[, materially non-public information].
At a Board meeting of Seagram's parent corporation, held by telephone conference call on January 13, 1981, the Board authorized Seagram to invest up to $150 million dollars in four companies, the identities of which were not revealed even to the Board members at that time,18 [AF 27; Weinberg Tr. 71] in connection with Seagram's possible interest in a candidate for acquisition. [Bronf. Tr. 62]. Seagram then immediately began purchasing fifteen million dollars worth of stock in each of the following companies: Santa Fe, Amax, St. Joe, and Kimberly Clark.
On January 28, 1981, Seagram determined that it would not proceed with the potential acquisition of Santa Fe.
[Bronf. Tr. 45]. Bronfman conveyed this information to Tome by February 6 at the latest. That decision precipitated a sale of Santa Fe stock and options by Finvest Geneva.
The decision not to pursue Santa Fe left only Amax and St. Joe as Seagram's potential takeover candidates. Tome was told of this whittling down of Seagram's possible targets.
Shortly thereafter, in early February, Amax was dropped by Seagram as a potential acquisition candidate. [Bronf. Tr. 61]. At a lunch that took place sometime on or before February 6, 1981, a partner of Lazard Freres, on behalf of Seagram, approached the Chairman of Standard Oil of California ("SoCal"), which owned 20% of Amax's stock, to ask if SoCal would be willing to sell its interest in Amax. After the Chairman of SoCal told him no, Seagram abandoned any idea of making an acquisition of Amax. [Bronf. Tr. 61].
According to Bronfman, " almost by a process of elimination, that left St. Joe." (emphasis added) [Bronf. Tr. 65]. Bronfman disclaimed a "clear" recollection of whether he told Tome of Seagram's discontinued interest in Amax: "I'm sorry, it's fuzzy."
[Bronf. Tr. 64]. Of the four possible targets in which Seagram had made an initial and token investment of fifteen million dollars, only St. Joe remained as a potential acquisition candidate for Seagram.
Bronfman asked Lazard Freres to find out as much information as possible about St. Joe and to come up with an evaluation. [Bronf. Tr. 65]. By February 25, 1981, Bronfman had decided that Seagram would go ahead with a tender offer for the acquisition of St. Joe. [Bronf. Tr. 68].
One small diversion developed, but only momentarily. At the suggestion of an investment banker, to canvass the possibility of a "joint venture" arrangement with Santa Fe, Bronfman met for lunch on February 26 in Chicago with the Chairman and Chief Executive Officer of Santa Fe, John Reed. That meeting, however, was unsuccessful. [Weinberg Tr. 106-117].
Seagram tried to keep its interest in St. Joe secret from the marketplace. The market activity in St. Joe securities from January through early March 1981 indicates that Seagram's efforts were largely successful; the value and price for St. Joe securities remained relatively flat. Indeed, Salomon Brothers & Co., a highly knowledgeable New York broker-dealer, executed sales of a vast block of up to one million St. Joe shares on behalf of an institutional client during the two weeks prior to, and including March 9, 1981, when the price range was $25 to $30 per share. [R. 116]. Had there been any indication abroad that a hostile tender bid to take over St. Joe was expected by the market, Salomon Brothers surely would have advised their client to hold, rather than sell, such a large position.
For several months prior to early March, the average daily volume of trading in St. Joe options on the Philadelphia Exchange had been only about 254 options. [AF 51(d)]. By Thursday, March 5, 1981, there was no trading in the March 1981 options of St. Joe which were due to expire that month. [AF 51(e)]. The average daily volume of trading in St. Joe common stock on the New York Stock Exchange was approximately 50,000 ...