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SEC v. TOME

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


June 3, 1986

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
GIUSEPPE B. TOME, PAOLO MARIO LEATI, LOMBARDFIN S.p.A., TRASATLANTIC FINANCIAL CO., S.A., NAYARIT INVESTMENTS, S.A., FINVEST UNDERWRITERS AND DEALERS CORP., CERTAIN PURCHASERS OF THE COMMON STOCK AND CALL OPTIONS FOR THE COMMON STOCK OF ST. JOE MINERALS CORP., AND BANCA DELLA SVIZZERA ITALIANA, Defendants

The opinion of the court was delivered by: POLLACK

FINDINGS AND OPINION

 POLLACK, Senior District Judge:

 THE ACTION

 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.

 I. BACKGROUND

 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.

 1. Tome

 Giuseppe B. Tome ("Tome") is an Italian national who resides in Switzerland. *fn1" 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. *fn2" [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. *fn3" [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, *fn4" 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].

 2. Finvest Geneva

 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") *fn5" 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. *fn6" [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. *fn7" [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.

 3. Lombardfin S.p.A.

 Lombardfin S.p.A., *fn8" 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. *fn9" 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].

 4. Leati and Csopey

 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].

 5. BSI

 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.

 6. NICO

 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].

 7. TFCO

 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. *fn10"

 8. Finvest Panama

 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; *fn11" 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), *fn12" [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. *fn13" [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. *fn14" 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. *fn15" [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." *fn16" [Bronf. Tr. 44]. The coal resource companies that Bronfman had on his short list at the time were Santa Fe, Amax, and St. Joe. *fn17"

 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].

 [Bronf. Tr. 49-50].

 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. *fn19"

 On January 28, 1981, Seagram determined that it would not proceed with the potential acquisition of Santa Fe. *fn20" [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. *fn21"

 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." *fn22" [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 shares. [AF 51(c)]. None of this was indicative to any market follower of an impending hostile tender offer.

 D. March 9, 1981 And Following

 On March 9, Bronfman was in Hilton Head, South Carolina. [Bronf Tr. 67]. He was scheduled to leave there by private jet at 3:00 p.m. [Ex. 900, 901]. He accelerated his departure, however, and instead left Hilton Head at 1:00 p.m. to attend a meeting specially called for later in the afternoon in New York, at 5:30 p.m., with several Seagram executives, its investment bankers, and outside counsel to discuss a St. Joe tender. [Ex. 900; Weinberg Tr. 162-64]. His bankers were concerned with insuring secrecy of the tender plans afoot by taking early action.

 Upon his return to his office in New York, before the 5:30 p.m. meeting, Bronfman received a telephone call from Tome who was also in New York (since Sunday, March 8) at the time. [Bronf. Tr. 73]. The reason given by Tome for the telephone call was to invite Bronfman to dinner for the following evening, March 10. [Bronf. Tr. 69].

 Bronfman declined Tome's dinner invitation on the grounds that he "was going to be in Montreal for a directors' meeting." [Bronf. Tr. 69]. According to Bronfman, Tome then asked Bronfman, "are you having a [Seagram] Board meeting in Montreal?" [Bronf. Tr. 89].

 Armed with his prior knowledge that St. Joe was Seagram's only remaining, viable takeover possibility and with the information he had just obtained from Bronfman in their March 9 phone conversation indicating, from the background of a search for a target, that some official action on corporate matters was imminent, and that Bronfman was on his way to a Board meeting, all signals of important business at hand, Tome decided to concentrate in one day frenzied buying of an enormous quantity of call options on St. Joe stock and of the stock itself; he also tipped others to do likewise. The circumstances were such that Tome reasonably inferred that a vote on a tender proposal was imminent. Tome's immediate conduct confirmed that he was not merely speculating on what was afoot; the extraordinary scope of his financial activities on the next morning was beyond any notion of rational, normal trading. The facts and circumstances lead to the ineluctable inference, which the Court draws, that Tome had obtained material non-public information in confidence from Seagram that it intended to make a tender offer for St. Joe.

 Beginning 8:55 a.m. on March 10, Tome, from New York, feverishly placed overseas orders for St. Joe call options to be executed on the Philadelphia Exchange for the accounts of NICO, TFCO, and Finvest Panama. [Ex. 19A]. In addition, by 12:35 p.m., Tome had urged others, i.e., clients and business associates, through overseas calls to Europe on at least fourteen separate occasions, [Ex. 19A], to purchase St. Joe securities on American Exchanges. Before the market opened on March 10, Tome called BSI three times, at 9:13 a.m., 9:26 a.m., and 9:51 a.m., speaking for 4 minutes, 11 minutes, and 3 minutes respectively. [Ex. 19A]. He placed the following orders for options *fn23" to purchase St. Joe stock on behalf of NICO, TFCO, and Finvest Panama through their trading accounts at BSI, [AF 52] spurring on the BSI broker "to rapidly pass the order": [Nesa Aff. P9B] Limit Per Underlying Account Quantity Series St. Joe Share *fn24" NICO 50 March $ 25 $ 3.00 200 March $ 30 .75 50 June $ 25 5.00 50 June $ 30 2.50 TFCO 50 March $ 25 $ 3.00 200 March $ 30 .75 50 June $ 25 5.00 50 June $ 30 2.50 Finvest Panama 100 March $ 25 3.00 400 March $ 30 .75 100 June $ 25 5.00 100 June $ 30 2.50 Tome called BSI three additional times that day, at 11:07 a.m., 11:51 a.m., and 12:32 p.m., speaking for 6 minutes, 1 minute, and 1 minute respectively. [Ex. 19A]. During these calls, approximately two hours after his initial calls to BSI, as the market price began to strengthen from the impact of a buying spree, Tome authorized an increase in the limits on the options previously ordered: [AF 53] Series Original Limit New Limit March $ 25 $ 3.00 $ 5.00 March $ 30 .75 2.00 June $ 25 5.00 7.00 June $ 30 2.50 4.00

 At the same time, Tome furnished BSI with a 1/4 point discretion and reduced the order for March $30 call options from 800, total, to 400 contracts. [AF 53]. On March 10, through its account at A.G. Becker, a U.S. securities brokerage company, BSI made the following St. Joe option purchases as a result of Tome's order: [AF 54] Total Quantity (NICO, TFCO and Average Option Price Per Finvest Panama) Series Underlying St. Joe Share 200 March $ 25 $ 5.25 455 *fn25" March $ 30 2.15 200 June $ 25 7.23 200 June $ 30 4.22

 These 1,055 options gave the purchaser the right to purchase a total of 105,500 shares of St. Joe common stock for prices of either $25 or $30 per share, depending on the series purchased.

 Also on March 10, Tome called Finvest Geneva twice, at 10:30 a.m. and at 10:54 a.m., speaking for 8 and 12 minutes respectively. [Ex. 19A]. On March 10, a Finvest Geneva representative, undoubtedly at Tome's direction, placed an order through Baird-Patrick to buy 3,000 St. Joe shares of common stock on the New York Stock Exchange for Finvest Panama's account at BSI. [AF 55]. That order was executed at $30 per share and delivery was made to BSI against payment from BSI's account at Irving Trust Company. *fn26" [AF 55].

 Two thousand of the three thousand St. Joe shares of stock purchased for the account of Finvest Panama on March 10 were sold for approximately $94,000, netting an overnight profit of approximately $34,000. [AF 59]. The remaining one thousand St. Joe shares subsequently were exchanged for 1,200 shares of Fluor Corp. [AF 60]. The proceeds of the sale and the 1,200 shares are frozen in BSI's account at Irving. [AF 60].

 In addition to Tome's direct purchases, his telephone calls caused and resulted in tippee transactions on a grand scale. At 8:55 a.m. on March 10, Tome called his client Banque du Rhone, a Swiss bank in Geneva, Switzerland, speaking for 17 minutes. [Ex. 19A]. About three hours later, at 11:58 a.m., Banque du Rhone purchased 200 St. Joe shares and 50 St. Joe call options, at a total cost of $16,750. The subsequent sale of these securities resulted in proceeds of $114,756, with a net profit of $98,006.

 At 10:17 a.m. on March 10, Tome called Leati of Lombardfin S.p.A. in Milan, Italy, speaking for 5 minutes. *fn27" [Ex. 19A]. Leati admits that in this telephone call Tome told Leati "I'd buy [St. Joe]." [Milan Tr. 96]. In view of the interrelationships, that expression was the equivalent of a virtual direction. [see also Milan Tr. 92]. Two minutes after hanging up on Tome's phone message, at 10:24 a.m., Leati, without first consulting his clients, [Csopey Tr. 123], began buying St. Joe securities on behalf of Lombardfin clients through their Lombardfin accounts. Before this first trade, Lombardfin S.p.A. had never traded even one single share of St. Joe securities. [Csopey Tr. 162]. By the end of the day, however, Leati had purchased more than 40,000 shares for the following accounts and the positions were shortly thereafter liquidated with the profit results indicated: [AF 64] Liquidation Account Name First Trade Quantity *fn28" Cost Proceeds Credit Suisse Lausanne 10:24 a.m. 10,000 S $ 294,375 $ 481,250 Osiris Ltd. 10:26 a.m. 500 O 168,237 835,062 Credito Sviz- zero Chiasso 11:45 a.m. 8,000 S 240,437 360,500 Unione di Bache Svizzere 1:00 p.m. 3,000 S 91,875 137,375 Banque Pictet 2:23 p.m. 3,000 S 90,375 138,375 Banque Privee 3:34 p.m. 5,000 S 150,625 235,812 Credito Sviz- zera Lugano 3:59 p.m. 9,200 S 276,850 437,200 Lombardfin No Time Securities Stamp 2,000 S 60,750 93,875 TOTALS 40,200 S & 500 O $ 1,373,524 $ 2,719,449

 Deducting total cost from total proceeds, these transactions resulted in a profit of $1,345,925 for these accounts. [AF 64].

 At 10:24 a.m. on March 10, about two minutes after getting off the phone with Leati at Lombardfin, Tome called Cramer, a Swiss bank in Geneva, Switzerland, and a Tome client, speaking for 5 minutes. [Ex. 19A]. Twelve minutes later, at 10:41 a.m., Cramer began buying St. Joe securities. It purchased 100 St. Joe call options and 1,000 St. Joe shares, at a total cost of $50,012. The subsequent sale of these securities shortly thereafter resulted in proceeds of $183,500, with a net profit of $133,488. [SEC Proposed Fact 65].

 At 11:15 a.m. on March 10, Tome called Compagnie de Banque et d'Investissements ("CBI"), a Swiss bank in Geneva, Switzerland, a Tome client, and a partner in Tome's Finvest organization, speaking for 1 minute. [Ex. 19A]. Less than two hours later, at 1:00 p.m., CBI ordered 150 St. Joe call options and 1,100 St. Joe shares, at a total cost of $64,837. [AF 66]. The subsequent sale of these securities shortly after the purchases resulted in proceeds of $234,000, with a net profit of $169,000. [AF 66].

 As noted previously, on March 10, Tome called Finvest Geneva twice, once at 10:30 a.m., speaking for 8 minutes, and once at 10:54 a.m., speaking for 12 minutes. [Ex. 19A]. Shortly after each of these calls, two of Tome's clients, Banque Gutzwiller ("Gutzwiller") and Trade Development Bank ("TDB") began buying St. Joe securities.

 At 10:40 a.m. on March 10, Gutzwiller ordered 2,000 St. Joe shares, at a total cost of $59,250. [SEC Proposed Fact 67]. The subsequent sale of these securities resulted in proceeds of $90,737, with a net profit of $31,487.

 At 12:02 p.m. on March 10, TDB ordered 13,000 St. Joe shares, at a total cost of $390,750. [SEC Proposed Fact 68]. At 6:39 a.m. on March 11, Tome called TDB, speaking for 10 minutes. [Ex. 19A]. Subsequently, beginning at 2:55 p.m. on March 11, TDB sold its St. Joe shares for proceeds of $597,675, with a net profit of $206,925. [SEC Proposed Fact 68].

 What method Tome used to convey his inside information to Gutwiller and to TDB cannot be stated with certainty. Under the circumstances and facts of this case, however, it is reasonably inferrable that Tome did convey his inside information to them. These two banks were clients that Tome brought over to Baird-Patrick, with Tome listed as representative for the accounts. [Ex. 909]. Both banks began trading in St. Joe securities at exactly the same time as the banks Tome had called directly. Both banks began trading very shortly after Tome's calls to Finvest Geneva. Gutzwiller placed its order two minutes after Tome had completed his first call to Finvest Geneva; TDB placed its order less than one half hour after Tome completed his second call to Finvest Geneva. The evidence shows that Tome called many of his other clients directly on March 10 to tell them to buy St. Joe securities. Tome called TDB directly at 6:39 a.m. on March 11, just hours before the Seagram tender offer was publicly announced. [Ex. 19A]. Unquestionably, Tome was in direct contact with at least TDB during this crucial interval.

 Despite the uncertainty over how the inside information was conveyed by Tome to Gutzwiller and to TDB, it is reasonably inferrable that it was conveyed. Moreover, this uncertainty over how is largely due to Tome's refusal to testify in this action, by invoking his Fifth Amendment privilege against self-incrimination. While Tome has a right to remain silent and thereby to not inculpate himself and to avoid confrontation therewith in the criminal action, he is not entitled to profit by his silence in this civil action. Therefore, to the extent necessary, this Court is justified in drawing an adverse inference from Tome's assertion of his Fifth Amendment privilege in this civil action. *fn29" This Court finds that Tome conveyed the inside information that he possessed to Gutzwiller and to TDB, and that they subsequently traded and profited personally on that information. Consequently, Tome is liable to account for their profits obtained from these transactions. When aggregated, the activities of Tome, as recited above, directly and indirectly, accounted for a significant portion of the volume of St. Joe option transactions executed on the Philadelphia Exchange on March 10: Percentage of Total Calls Total St. Joe On St. Joe Total St. Joe Calls Purchased Represented Calls Purchased By Defendants By Defendants' Series On March 10 March 10 Purchases March $ 25 285 200 70% March $ 30 2334 705 30% June $ 25 1334 200 15% June $ 30 740 350 74% June $ 35 463 50 11% TOTALS 5,626 1,855 33%

 In addition to options on 185,500 shares of St. Joe common stock, Tome and his satellite purchasers accounted for the purchase of at least 60,500 St. Joe shares, 10.67% of the total volume in St. Joe stock on the New York Stock Exchange on March 10. [SEC Proposed Fact 73(a)].

 On March 10, 1981, at 7:00 p.m., an unscheduled special meeting of the Seagram parent company Board of Directors was held in Montreal, Canada. [Ex. 46]. This special meeting was called on short telephone notice according to the Board minutes. [Ex. 46]. Bronfman, in common with the other directors, unaware of Tome's feverish trading activity earlier in the day, attended this special meeting.

 Bronfman's deposition testimony was content to characterize this special meeting on March 10 as merely an "acceleration" of the "regularly scheduled" Board meeting, which was accelerated from March 11 in response to suggestions of the investment bankers concerned with maintaining confidentiality of the ongoing preparation of the tender offer to be voted on by the directors as well as probably dismayed at the market activity in the St. Joe stock on March 10. Bronfman's uncertain recollection was that the decision to accelerate was made at lunch on March 10, [Bronf. Tr. 88], but there was no luncheon -- if the recollection were true, thirteen of the fifteen Seagram parent company Directors, including eight of the ten outside Directors, and the substantial coterie of investment bankers, consultants, engineers, and lawyers who showed up at the meeting, came to Montreal a day earlier than the fixed meeting date on at most six or seven hours notice before the meeting began. There was no testimony that pinpointed when he first considered accelerating the meeting, i.e., whether accelerating the Board meeting was considered before or after he spoke to Tome on March 9 and turned down a dinner engagement for the evening of the special meeting.

 On March 10, 1981, the parent company authorized Seagram to make its tender offer for the shares of St. Joe. [Ex. 46].

 The defendants presented a witness with a view to explaining the extraordinary 50% surge of the market price on March 10th 1981. Mr. Marc Cohen, an analyst in mining industries for the brokerage firm of Kidder, Peabody held to the dubious belief that events over many prior months caused the explosion. When questioned about what material non-public information might catalyze what occurred, he conceded that an awareness that a special meeting of the Seagram Board was about to take place would have been material, non-public information in light of the contemporaneous facts and circumstances and inferentially might account for what had happened. [R. 76-77].

  On March 11, before Seagram's announcement of the St. Joe tender offer, Tome called BSI twice, at 6:23 a.m. and 6:25 a.m., speaking for 1 and 2 minutes respectively. [Ex. 19A]. At 8:00 a.m., BSI called Tome back. [Nesa Aff. P19B]. During this conversation, Tome instructed BSI to place an order for an additional 2,055 St. Joe call options without price limit at the market. [Nesa Aff. P19B]. While BSI was attempting to place this order, Tome anxiously stayed on an open telephone line to BSI for confirmation. [Nesa Aff. P19B]. BSI informed Tome that 2,000 call options was the floor trading limit on the Exchange. Tome then reduced his call option purchase order to 945 call options. [AF 56; Ex. 11 P10B].

  Again that morning, before the Seagram tender offer for St. Joe was publicly announced, Tome again placed overseas calls to two European clients. At 6:04 a.m. he called CBI, speaking for 1 minute. [Ex. 19A]. At 6:39 a.m. Tome called TDB, speaking for 10 minutes. [Ex. 19A].

  At 9:22 a.m. on March 11, the Seagram tender offer for St. Joe was publicly announced. [AF 36]. The announcement resulted in a delay in the opening of trading for St. Joe securities. [AF 37]. In consequence, the large call option orders Tome placed on the morning of March 11 were never executed on the Exchange. [Nesa Aff. P9B].

  At 10:30 a.m. on March 11, a so-called "regularly scheduled" Board meeting of the Seagram parent company was held in Montreal pursuant to a notice of meeting that had been forwarded to all Directors on February 23, 1981. [Ex. 47].

  After the meeting on March 11, Bronfman returned to New York from Montreal. Through arrangement prior to March 9, 1981, between their wives [Bronf. Tr. 75], Bronfman and Tome met and went in the evening of March 11th to see the play they had invested in, "Sophisticated Ladies." [AF 38(10)].

  That evening, Bronfman discussed Seagram's tender offer for St. Joe with Tome. [Bronf. Tr. 87]. Bronfman discussed his telephone conversation with the St. Joe management, whom he had called just prior to Seagram's public announcement of the St. Joe tender to advise them of the impending offer. [Bronf. Tr. 87]. Bronfman discussed with Tome the price Seagram had tendered and speculated to Tome on Seagram's chance of success. [Bronf Tr. 87]. In addition, Bronfman disclosed the timetable for the St. Joe tender and the behind-the-scenes arrangements for Board meeting schedule changes. [Bronf. Tr. 88].

  Despite Bronfman's confidences and discussions with Tome on the topic of the St. Joe tender offer that evening, Tome was eloquently silent and mentioned absolutely nothing to Bronfman about Tome's massive orders, trades, telephone calls overseas, and exhortations to others in regard to St. Joe securities. [Bronf. Tr. 91].

  Beginning on March 12, 1981, Tome instructed BSI immediately to liquidate and cash in the St. Joe option positions acquired on March 10. [Nesa Aff. P9D]. Specifically, at about 8:24 a.m., Tome called BSI, speaking for 9 minutes, [Ex. 19A] and instructed it to sell all March options he had purchased for the accounts of NICO, TFCO, and Finvest Panama. [Nesa Aff. P9D]. At 8:43 a.m., Tome called Banque du Rhone, speaking for 6 minutes. [Ex. 19A]. Shortly thereafter, Banque du Rhone cashed in its purchases.

  On March 12, Bronfman gave a dinner party in Tome's honor for twenty people at Bronfman's house. [AF 38(9)]. Once again, Bronfman talked to Tome about the Seagram tender offer for St. Joe. Again, Tome maintained total secrecy and made no mention to Bronfman about his activities in St. Joe securities in the prior two days. [Bronf. Tr. 91].

  On March 13, at 8:47 a.m., Tome called BSI, speaking for 11 minutes, [Ex. 19A] and instructed it to sell the 50 June $25 options and 50 June $30 options he had acquired on March 10. [Nesa Aff. P9D]. On that same day, news of the SEC inquiry into possible insider trading on the Seagram bid for St. Joe was publicly disseminated. [Ex. 908].

  Tome decided it was time to leave New York. Although he had reservations through March 18 at his hotel in New York, Tome cut short his visit to the United States and returned on March 14 to Switzerland. [Ex. 24].

  On March 15, 1981, Tome, in Geneva, called BSI and requested that they rearrange the option purchases to make it appear that Finvest Panama had not purchased any of the St. Joe options. [Nesa Aff. P9E]. He suggested that Finvest Panama's purchases of March options be reallocated to NICO and of June options be reallocated to TFCO. [Nesa Aff. P9E]. The ostensible reason for this falsification and switch was to "secure greater confidentiality within his organization." [Nesa Aff. P9E]. After a series of meetings, BSI vehemently declined to change its records of the transactions as they were effected. [Moscatelli Aff. P9]. BSI reported to Tome that its account entries were "unalterable" and Tome's requests to change the records were rejected. [Moscatelli Aff. P9].

  The SEC filed this suit on March 27, 1981. The SEC initially had difficulty in identifying so shortly after the trading activity the foreign nationals who made the trades, and the defendants were initially identified by category, not by name. As it became clear exactly who had engineered the St. Joe trades, their names were added by amendment to the title of the lawsuit.

  BSI, the Swiss bank, and Irving were the only defendants named in this suit on March 27 1981. The New York branch was in control of some proceeds of Tome's trading. The accounts for which trades were made through the Lugano branch of the bank were identified only as "Unknown Purchasers."

  As a result of the liquidation of the options transactions through BSI, approximately $1,825,000 (less commissions) was credited to BSI's account at Irving Trust Company, at the direction and on behalf of Tome, NICO, TFCO, and Finvest Panama. Of this sum, approximately $1,442,000 represented profit. [SEC Proposed Fact 58(1), as recalculated].

  Despite the fact that Tome's name had not been mentioned in any public documents as being implicated in insider trading, on Monday, March 30, 1981, after hearing of this suit, Bronfman immediately telephoned Tome. [Bronf. Tr. 92-93]. Bronfman called Tome because he was concerned that:

  

perhaps he [Tome] had done something. I wanted to make doubly sure he hadn't. Because the only person I knew in Switzerland that would have any knowledge one way or another of anything that was going on, at least for me, was Mr. Tome.

  [Bronf. Tr. 93].

  Bronfman was unable to reach Tome. [Bronf. Tr. 92].

  From Zurich, Switzerland, Tome returned the call by telephoning Bronfman at his apartment that same night at approximately 7:20 p.m. [Bronf. Tr. 92]. Tome said that he was sorry that Bronfman had called him earlier. [Bronf. Tr. 92]. He then told Bronfman the first of several boldfaced lies:

  

You know, I've been in this business [ i.e., securities] for 20 years and I know what to do and what not to do. And clearly I certainly didn't do anything. . . . But, it's a little more complicated than that and I will see you in New York next week.

  [Bronf. Tr. 92-93].

  A week later, on Monday, April 6, at approximately 5:30 p.m., Tome dropped by Bronfman's apartment in New York unexpectedly. [Bronf. Tr. 94]. Tome lied again and told Bronfman that, in his absence from Geneva, "one of his [Tome's] people" had put through an order for 3,000 shares of St. Joe stock but that "he [Tome] hadn't personally placed the order." *fn30" [Bronf. Tr. 95]. Bronfman asked Tome, point blank, "Were those shares in any way beneficially owned by you or members of your family?" Tome responded unequivocally, "No." [Bronf. Tr. 97].

  Bronfman and Tome met again the next morning, April 7, at 10:00 a.m. at Bronfman's office. [Bronf. Tr. 98]. Bronfman's attorney was present at that meeting. [Bronf. Tr. 98]. This time Tome had an attorney present, who arrived at approximately 10:20 a.m. [Bronf. Tr. 100-01]. Bronfman and his attorney made it clear to Tome and his attorney that any conversations they would have that day would be reported to the SEC. [Bronf. Tr. 102].

  At this meeting, Tome "reiterated that none of [the 3,000 shares of St. Joe stock purchased] had gone into his accounts" and that neither he, his wife, his children, nor any members of his family had any beneficial interest in St. Joe stock. [Bronf. Tr. 106-07]. He again said that "his clerk" had heard rumors about St. Joe and had decided, on his own, to buy 3,000 shares and "put them in various accounts." [Bronf. Tr. 101].

  In addition, Tome asserted flatly that he had "absolutely nothing to do" with the St. Joe option purchases on March 10. [Bronf. Tr. 99]. In fact, in response to a question from Bronfman's lawyer concerning whether Tome had any reason to believe that the beneficial holder of the 3,000 St. Joe shares was in any way related to the beneficial holders of the St. Joe options involved in this suit, Tome said that "no, he had no reason to think so." [Bronf. Tr. 111]. Tome disclaimed any direct or indirect beneficial interest in any option trades. [Bronf. Tr. 111]. He termed it a "coincidence" that on March 10th, in addition to the 3,000 shares, defendant BSI also purchased 1,055 St. Joe call options on 105,500 shares of stock for prices of either $25, $30, or $35 per share. [Bronf. Tr. 144].

  The canards were ultimately exploded. After the SEC's diligent investigation uncovered irrefutable evidence of Tome's involvement in the St. Joe option and stock trades, Tome's counsel conceded on the record that Tome had a beneficial interest in St. Joe stock purchases. *fn31" At trial, Tome's counsel and the Court engaged in the following colloquy:

  

Counsel: . . . Tome was responsible for purchasing stock on March 10. That's not denied. There was an announcement --

  

The Court: You mean it's not any longer denied?

  

Counsel: It is not denied, your Honor.

  

The Court: He falsified about that initially, didn't he?

  

Counsel: I believe that the testimony of Bronfman indicates that he [Tome] was not candid about that fact, Judge.

  

The Court: That's the understatement of the year.

  [R. 22]

  On April 8, 1981, Tome called Bronfman from Geneva, Switzerland, and in a belligerent tone accused Bronfman of getting him into this "mess." [Bronf. Tr. 103]. Tome claimed that Bronfman's lawyers were going to protect Bronfman and leave Tome "out in the cold." [Bronf. Tr. 103]. When Tome continued to talk to Bronfman in this belligerent tone, Bronfman terminated the call. [Bronf. Tr. 103]. Fifteen minutes later, Tome called him back, this time very distraught. [Bronf. Tr. 104]. Tome was concerned with the possibility of going to jail because if he did "his career would be finished." *fn32" [Bronf. Tr. 104].

  Sometime thereafter, Bronfman, strangely enough, asked his wife to call Tome's wife to tell her "Don't worry. We love you. . . . The reason Edgar's [Bronfman] not calling you is because he's being advised not to. But he still loves you." [Bronf. Tr. 103].

  E. Leati's Disclosures

  Leati himself admits that in a telephone conversation on March 10, 1981, Tome advised him to purchase St. Joe securities. [Milan Tr. 136]. Leati states that he got the "hint" to buy St. Joe from Tome when Tome said "I'd buy [St. Joe]." [Milan Tr. 95-96]. Leati claims, however, that he never heard of Seagram, as a company, until the official announcement of the tender offer nor did he know of Tome's (and Finvest Geneva's) relationship with Seagram. [Milan Tr. 97]. He claims that after Tome gave him the "hint" on St. Joe, he bought the stock not because of any knowledge of an imminent Seagram tender offer but because "the volume [of trading in St. Joe stock] was increasing in the days immediately prior to the transaction." [Milan Tr. 137]. In essence, Leati would have this Court believe that although he received the "hint" to buy St. Joe from Tome, Leati engaged in some sophisticated, independent market research and analysis after speaking to Tome and before making the actual decision to purchase St. Joe securities for the accounts of Lombardfin S.p.A.'s clients. That notion is unworthy of belief.

  In fact, the volume was not steadily increasing in the week and days immediately prior to Lombardfin S.p.A.'s March 10 purchases. *fn33" More significantly, however, Leati placed the first order for St. Joe stock, 10,000 shares, approximately two minutes after finishing his telephone conversation with Tome. *fn34" Leati could not have had time to investigate the St. Joe stock before trading. In this regard, it is highly significant that before March 10, 1981, Lombardfin S.p.A. had never traded even one single share of St. Joe stock. [Csopey Tr. 162]. On March 10, 1981, however, it traded more than 40,000. [AF 64].

  [R. 108].

  Not surprisingly, Csopey, Leati's former partner at Lombardfin S.p.A., tells a very different -- and more believable -- version of what caused Lombardfin S.p.A. to trade in St. Joe securities on March 10. *fn35" In his testimony, Leati was evasive and belligerent, often berating the attorney for asking a particular question. [e.g., Milan Tr. 78, 88-89, 94, 104, 105, 108, 110, 121-22, 131, 135, 136-37]. In sharp contrast, Csopey's testimony was careful and credible. *fn36"

  Csopey was in charge of the Rome office of Lombardfin S.p.A.'s Italian domestic subsidiary -- Leati was in charge of the Milan office -- and thus was usually in Rome. On March 10, 1981, however, Csopey was in Milan to visit customers and to attend a Board meeting the next day. [Csopey Tr. 108].

  While in the Milan office on March 10, Csopey and his then partner, Leati, had a private conversation in Leati's office. [Csopey Tr. 58]. Leati told Csopey that Tome had called Leati from New York. *fn37" [Csopey Tr. 149]. "Leati [] had been advised by Tome . . . that Seagrams [sic] would make, in the next few days, make a tender offer for St. Joe Minerals." [Csopey Tr. 37-38]. Leati said that, in exchange for $200,000, Tome was passing this information to Lombardfin S.p.A. for Lombardfin to take advantage of for itself and for its customers. [Csopey Tr. 38-39]. This prospective payment to Tome was contingent upon there being a takeover [Csopey Tr. 39] and was to come not from Leati nor from Lombardfin S.p.A., but from those individuals profiting from Tome's information. [Csopey Tr. 163].

  Leati discussed the reliability of Tome's information with Csopey, mentioned that Tome was a consultant to Seagram [Csopey Tr. 82], and stated that "since Tome claimed to have a close personal relationship to Seagrams [sic], that this [information] could well be true." [Csopey Tr. 40].

  Leati told Csopey that he had already bought some stock and options in St. Joe that day while Csopey was not in the office. [Csopey Tr. 110-111]. Leati said that he had not spoken to any customers before placing trades on their behalf in St. Joe on March 10. [Csopey Tr. 123]. Indeed, Csopey knew from his own experience that mobilizing so many trades in so short a period of time necessitated Leati to be acting on his own discretion, without first checking with customers. [Csopey Tr. 127].

  At the end of this conversation, Leati, considering additional purchases of St. Joe securities, said to Csopey "Let's give it a try." [Csopey Tr. 39]. In fact, Leati placed additional orders for St. Joe securities on March 11 before the New York Stock Exchange opened, but these orders could not be executed because the market opening in St. Joe was delayed by the Seagram tender offer announcement. [Csopey Tr. 80-81].

  The next day, the Board meeting of Lombardfin S.p.A., and its Italian subsidiary, was interrupted by news of the Seagram tender offer for St. Joe. The discussion at the meeting then turned to St. Joe, with comments ranging from an estimate of the stock's opening price to regulatory consequences for the prior day's trading. [Csopey Tr. 49]. Leati explained to the Board members, who were not intimately familiar with the mechanics of New York Stock Exchange trading, what was going on. [Csopey Tr. 50]. In discussing the regulatory consequences, Leati admitted that the firm had committed a securities violation by trading on inside information but apparently downplayed the risk of being caught by remarking that Lombardfin S.p.A. had accounted for only a "small fraction" of the previous day's total trading volume. [Csopey Tr. 50]. Csopey does not remember if, at that meeting, Tome was identified to the Board as the person providing the inside information. [Csopey Tr. 58]. He was, at least, identified to them later. [Csopey Tr. 58].

  On March 11, 1981, Leati told Csopey that Tome and Leati had exchanged telephone calls and Tome had told him that "the launch of the [Seagram] takeover bid had been anticipated [ i.e., accelerated] due to market action." [Csopey Tr. 51].

  Throughout 1981, after the SEC had instituted this lawsuit, Tome regularly visited Lombardfin's office in Milan. [Csopey Tr. 94-95]. When he was in Milan, Csopey and Tome had discussions about this lawsuit in general, particularly how large the legal fees were for all people concerned. [Csopey Tr. 54]. Subsequently, Leati told Csopey that Tome had pressed Leati for contributions to the legal fees and to a pool which would settle the case. [Csopey Tr. 57]. In fact, when Lombardfin S.p.A. itself began running up substantial legal fees in connection with this case, Leati told Csopey that Leati should have anticipated these legal expenses and "taken account" of them in the money given to Tome for providing the inside information. [Csopey Tr. 157].

  II. INSIDER TRADING

  The SEC brings this civil insider trading action, 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 based on Sections 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(e) and 78aa. For the reasons shown hereafter, the SEC is entitled to prevail.

  The federal securities laws do not contain an express definition of insider trading. Instead, liability for insider trading has grown out of the antifraud provisions of the securities laws and regulations, primarily Section 10(b) and Rule 10b-5. As the Supreme Court has made clear, however, "not every instance of financial unfairness constitutes fraudulent activity under § 10(b)." Chiarella v. United States, 445 U.S. 222, 232, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980). The gravamen of an insider trading violation under these provisions is breach of a fiduciary or similar duty of trust and confidence arising from some relationship. An individual trading on inside information in breach of such a duty, without prior disclosure, *fn38" commits fraud within the meaning of Section 10(b) and Rule 10b-5.

  The term "insider trading" actually is a misnomer, only imperfectly describing the proscribed conduct, since liability under the securities laws can extend to those who are not insiders, as that term is commonly understood (e.g., directors and officers of the corporation, see Moss v. Morgan Stanley Inc., 719 F.2d 5, 10 & n.8 (2d Cir. 1983), cert. denied sub nom., Moss v. Newman, 465 U.S. 1025, 79 L. Ed. 2d 684, 104 S. Ct. 1280 (1984), if these "outsiders" either become "temporary insiders" *fn39" of the corporation by legitimately being given access to confidential corporate information solely for corporate purposes, Dirks v. SEC, 463 U.S. 646, 655 n.14, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983), or become "tippees" by receiving inside information improperly. Id. at 660 (emphasis in original). Temporary insiders acquire independent fiduciary duties to the corporation and to its shareholders, and thus commit fraud within the meaning of Section 10(b) and Rule 10b-5 when they breach their fiduciary or similar duty of trust and confidence. Tippees, however, have no independent fiduciary or similar duty of trust and confidence to the corporation or to its shareholders; their liability for insider trading "is derivative from that of the insider's duty." Id. at 659. If there has been no breach by an insider (i.e., the "tipper") in conveying the inside information to the tippee, there can be no derivative breach by the tippee. Id. at 662. Even if there has been a breach by the tipper of his fiduciary or similar duty of trust and confidence, the tippee only commits fraud within the meaning of Section 10(b) and Rule 10b-5 if the tippee trades on that inside information when he "knows or should know" that the inside information was conveyed to him in breach of the tipper's duty. Id. at 660.

  Tippers are jointly and severally liable for the profits obtained (or losses avoided) by their tippees. See Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 105 S. Ct. 2622, 2630, 86 L. Ed. 2d 215 (1985)("A tippee trading on inside information will in many circumstances be guilty of fraud against individual shareholders, a violation for which the tipper shares responsibility.")(emphasis added); Elkind v. Liggett & Myers, Inc, 635 F.2d 156, 169 (2d Cir. 1980). *fn40" Indeed, the Supreme Court has held that the tipper's conduct, almost invariably, is more culpable than that of the tippee. Bateman, 105 S. Ct. at 2630-31. Tipper liability is necessary so that a fiduciary does not attempt indirectly to do that which he may not do directly. Dirks, 463 U.S. at 659.

  Before tipper and tippee liability arises under Section 10(b) and Rule 10b-5, however, there first must be a breach of the insider's fiduciary or similar duty of trust and confidence, satisfying the fraud element. "The test is whether the insider personally will benefit, directly, or indirectly, from his disclosure." Id. at 662. Focusing on objective criteria, the court must find "a pecuniary gain or a reputational benefit that will translate into future earnings." Id. at 663. As examples of situations satisfying this breach requirement, the Supreme Court noted "a relationship between the insider and the recipient that suggests a quid pro quo from the latter or an intention to benefit the particular recipient" and "a gift of confidential information to a trading relative or friend." Id. at 664 (emphasis in original). Determining whether the insider personally benefits from a disclosure is a question of fact. Id.

  One relationship giving rise to a duty sufficient to support liability under Section 10(b) and Rule 10b-5 is a fiduciary or similar relationship of trust and confidence between the shareholders of the company whose stock is being traded and the individual trading. This is the relationship the Supreme Court focused on in Chiarella and Dirks. Recently, however, in actions brought by governmental agencies, the lower federal courts have been extending liability under Section 10(b) and Rule 10b-5 to other relationships, under a "misappropriation" theory.

  The common-sense notion underlying the misappropriation theory is that one who misappropriates valuable information for his own benefit, in breach of a fiduciary or similar duty of trust and confidence, has surely committed fraud on the person or entity to whom that duty is owed. The prerequisite for liability under the misappropriation theory is misuse of nonpublic information in breach of a fiduciary or similar duty of trust and confidence to some person or entity, although that person or entity need not necessarily be a purchaser or a seller of securities. *fn41" See Report of The Task Force On Regulation of Insider Trading (part 1): Regulation Under The Antifraud Provisions of The Securities Exchange Act of 1934, 41 Bus. Law. 223, 236 (Nov. 1985) [hereinafter cited as ABA Report]. Thus, under the misappropriation theory, the scope of the duty required to ground liability is no different than the one outlined by the Supreme Court in Chiarella, and reiterated in Dirks ; *fn42" the person or entity to whom that duty is owed, however, for purposes of liability under Section 10(b) and Rule 10b-5, is not limited solely to shareholders of the corporation whose stock is being traded (i.e., the target company in a takeover situation) or to that corporation itself.

  The Second Circuit, by a divided Court, has just held that the fraud element of a 10b-5 violation is satisfied when a defendant newspaper writer misappropriates, and then trades on (or tips others who trade on), nonpublic information on forthcoming articles to be published regarding the subject securities, in breach of a fiduciary or similar duty of trust and confidence to the newspaper. The violators did not breach a duty directly or derivatively to anyone involved in acquiring the securities. United States v. Carpenter, 791 F.2d 1024, 1029 (2d Cir. 1986)("the misappropriation theory more broadly proscribes the conversion by 'insiders' or others of material non-public information in connection with the purchase or sale of securities.")(emphasis in original).

  This "misappropriation" theory of liability under Section 10(b) and Rule 10b-5 first appeared in the case law in Chiarella v. United States, 445 U.S. 222, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980), when the government urged the Court to affirm Chiarella's conviction for insider trading on the alternative basis that Chiarella, an employee of a financial printer employed by an acquiring corporation involved in a tender offer, violated Section 10(b) and Rule 10b-5 when he breached his duty of confidentiality to the acquiring corporation by acting upon information he received by virtue of his employee status. Id. at 235.

  The Court held that "it need not decide whether this theory has merit for it was not submitted to the jury." Id. at 236. Four Justices, however, explicitly voiced their view that a defendant violates Section 10(b) and Rule 10b-5 when misappropriating, and then trading on (or tipping others who trade on), nonpublic information in breach of a fiduciary or similar duty of trust and confidence. See id. at 245 (Burger, C.J., dissenting)(Chiarella "misappropriated -- stole to put it bluntly -- valuable nonpublic information entrusted to him in the utmost confidence."); id. at 239 (Brennan, J., concurring); id. at 245 (Blackmun, J., joined by Marshall, J., dissenting). More recently, in Bateman, Eichler, Hill Richards v. Berner, 472 U.S. 299, 105 S. Ct. 2622, 86 L. Ed. 2d 215 (1985), seven Justices joined an opinion stating that "we also have noted that a tippee may be liable [under Rule 10b-5] if he otherwise 'misappropriate[s] or illegally obtain[s] the information.'" Id. at 2630 n.22 (quoting Dirks v. SEC, 463 U.S. 646, 665, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983)). The two Justices who did not join the Bateman opinion (Justice Marshall did not participate and the Chief Justice concurred) were ones who in Chiarella had explicitly approved the misappropriation theory.

  Although the Supreme Court has not yet explicitly decided the validity of the misappropriation theory of liability under Section 10(b) and Rule 10b-5, all nine current members of the Court appear to support the misappropriation theory.

  Significantly, in the interim between the Chiarella and the Bateman decisions, the Congress has expressly approved the misappropriation theory as being consistent with the purposes of the antifraud provisions of the securities laws. See Carpenter, supra, 791 F.2d 1024, slip op. at 3644 (finding "persuasive" the congressional intent expressed in the ITSA). In the House Committee Report accompanying the Insider Trading Sanctions Act of 1984 ("ITSA"), Pub. L. No. 98-376, 98 Stat. 1264 (codified in scattered sections of 15 U.S.C.) (there was no Senate report), the Congress, citing with approval the Second Circuit's decision in United States v. Newman, 664 F.2d 12 (2d Cir. 1981), conviction aff'd without published opinion, 722 F.2d 729 (2d Cir.), cert. denied, 464 U.S. 863, 104 S. Ct. 193, 78 L. Ed. 2d 170 (1983), which upheld the legal sufficiency of a criminal indictment under Section 10(b) and Rule 10b-5 based on the misappropriation theory, stated that:

  

In certain widely-publicized instances, agents of tender offerors and persons contemplating a merger or acquisition have used for personal gain information entrusted to them solely for a business purpose. Such conversion for personal gain of information lawfully obtained abuses relationships of trust and confidence and is no less reprehensible than the outright theft of nonpublic information. In other areas of the law, deceitful misappropriation of confidential information by a fiduciary, whether described as theft, conversion, or breach of trust, has consistently been held to be unlawful. The Congress has not sanctioned a less rigorous code of conduct under the federal securities laws.

  H. Rep. No. 355, 98th Cong., 2d Sess. 4-5 (1983) [hereinafter cited as ITSA House Report], reprinted in 1984 U.S. Code Cong. & Ad. News 2274, 2277-78 (footnotes omitted and emphasis added). Although Congress, in the ITSA, increased the sanctions available for insider trading violations, it did not attempt to provide a definition of insider trading because -- once again expressly citing the Second Circuit's decision in United States v. Newman, supra -- "the Committee believes that the law with respect to insider trading is sufficiently well-developed at this time to provide adequate guidance." Id. at 13, reprinted in 1984 U.S. Code Cong. & Ad. News at 2286.

  Frequently, the misappropriation theory will hold liable those persons breaching a duty of trust and confidentiality to a tender offeror. Indeed, insiders of a tender offeror, because they are often the only ones with advance knowledge of an impending hostile tender offer, are the ones most likely to trade (or tip) on nonpublic information regarding a hostile tender.

  H. Rep. No. 355, 98th Cong., 2d Sess. 4-5 (1983) [hereinafter cited as ITSA House Report], reprinted in 1984 U.S. Code Cong. & Ad. News 2274, 2277-78 (footnotes omitted and emphasis added). Although Congress, in the ITSA, increased the sanctions available for insider trading violations, it did not attempt to provide a definition of insider trading because -- once again expressly citing the Second Circuit's decision in United States v. Newman, supra -- "the Committee believes that the law with respect to insider trading is sufficiently well-developed at this time to provide adequate guidance." Id. at 13, reprinted in 1984 U.S. Code Cong. & Ad. News at 2286.

  Frequently, the misappropriation theory will hold liable those persons breaching a duty of trust and confidentiality to a tender offeror. Indeed, insiders of a tender offeror, because they are often the only ones with advance knowledge of an impending hostile tender offer, are the ones most likely to trade (or tip) on nonpublic information regarding a hostile tender.

  The problem of insider trading on tender offers has become particularly acute, especially in conjunction with the greater availability of option contracts. Persons with advance knowledge of a tender offer announcement have opportunities to profit substantially in a short time with little or no risk of loss. These opportunities can be greatly maximized on the options market because the value of an option contract tends to increase by a much greater percentage than the value of the underlying stock.

  By enacting the ITSA, Congress has expressed its heightened concern over the growing problem of insider trading. One of the ITSA's provisions is an amendment to section 21(d) of the Exchange Act, expanding the SEC's enforcement remedies; it gives the SEC the authority to seek from anyone violating the insider trading laws a civil penalty of up to three times the amount of the profit gained (or loss avoided) by the insider trading. *fn43"

  Against the background of this analytic framework and heightened Congressional concern, we turn to the liability of the individual defendants in this case.

  III. LIABILITY

  A. Tome's Liability44

  1. Violation of Section 10(b) and Rule 10b-5

  In order to prove its civil claim against Tome for violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5 (1985), the SEC must establish by a preponderance of the evidence, *fn45" (1) a misrepresentation, or an omission (where there is a duty to speak), or other fraudulent device; (2) in connection with the purchase or sale of any security; (3) scienter by the defendant in making that misrepresentation or omission, Aaron v. SEC, 446 U.S. 680, 691, 64 L. Ed. 2d 611, 100 S. Ct. 1945 (1980); and (4) materiality of that misrepresentation or omission. See Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 942 & n.5 (3d Cir.), cert. denied, 474 U.S. 935, 106 S. Ct. 267, 88 L. Ed. 2d 274 (1985); Warren v. Reserve Fund, Inc., 728 F.2d 741, 744 (5th Cir. 1984); SEC v. Washington County Utility District, 676 F.2d 218, 225 (6th Cir. 1982). See generally ABA Report, supra, 41 Bus. Law. at 231. *fn46"

  a. Misrepresentation, Omission, or Other Fraudulent Device

  Tome is liable under the misappropriation theory for the St. Joe purchases directly ordered by him for his NICO, TFCO, and Finvest Panama accounts at BSI since he "fail[ed] to disclose material nonpublic information before trading on it and thus ma[de] 'secret profits.'" *fn47" Dirks v. SEC, 463 U.S. 646, 654, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983). He is also jointly and severally liable, with his tippees, for the St. Joe purchases of those he tipped since he improperly disclosed confidential corporate information to the tippees in breach of his fiduciary or similar duty of trust and confidence to Seagram, its shareholders, and Bronfman.

  At the time he bought St. Joe securities and tipped others to do likewise, Tome was an insider of Seagram, the tender offeror. Bronfman and Seagram reposed their trust and confidence in Tome's integrity; Tome callously and willfully betrayed that trust.

  For many months, Bronfman had provided Tome with detailed (and continually updated) nonpublic information concerning Seagram's acquisition plans, solely for the confidential corporate purpose of evaluating Seagram's alternatives and gauging the European investment community's reaction to such a move.

  The Supreme Court has recognized that persons, such as Tome here, given access to confidential corporate information solely for corporate purposes become temporary insiders of that corporation, thereby acquiring the same fiduciary duties to the corporation as other insiders:

  

Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. . . . When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tippee. . . . For such a duty to be imposed, however, the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.

  Dirks, 463 U.S. at 655 n.14.

  Seagram and Bronfman of course expected their confidences to Tome to be kept confidential by him. The relationship between the management of a corporation and its financial advisors and consultants regarding prospective hostile tender offers is inherently one which implies a duty of confidentiality. Seagram and Bronfman certainly had such an expectation of confidentiality. As soon as Bronfman learned of this lawsuit and suspected that Tome's duty of confidentiality had been breached, Bronfman called Tome in Switzerland "to make doubly sure" Tome had not been involved in the illegal St. Joe purchases alleged in the SEC's complaint. Tome, on his part, explicitly acknowledged his obligation to keep the information he received confidential when he lied to Bronfman about trading on the inside information he had. Had there been no expectation of confidentiality, there would have been no need for Tome to lie about his trading (and tipping) in St. Joe securities when Bronfman specifically questioned him.

  Tome breached his fiduciary or similar duty of trust and confidence by trading for his own behalf in the St. Joe options purchased for his NICO, TFCO, and Finvest Panama accounts at BSI. He also breached his duty by tipping others, expecting in exchange both money (the $200,000 he demanded Leati obtain from the benefitting customers of Lombardfin S.p.A.) and reputational benefits as a securities broker, that no doubt subsequently would result in increased business for him and his company, Finvest Geneva.

  Tome, therefore, traded and tipped on the confidential inside information he received from Seagram and Bronfman about St. Joe, in breach of his fiduciary duty to Seagram, its shareholders, and Bronfman. He thereby committed fraud within the meaning of Section 10(b) and Rule 10b-5 by misappropriating valuable corporate information for his own benefit.

  b. In Connection With

  This requirement is easily satisfied since "the information [Tome] stole ha[d] no value whatsoever except 'in connection with' his subsequent purchase of securities." SEC v. Materia, 745 F.2d 197, 203 (2d Cir. 1984), cert. denied, 471 U.S. 1053, 105 S. Ct. 2112, 85 L. Ed. 2d 477 (1985). The sole purpose of Tome's theft of confidential information regarding Seagram's tender offer plans "was to reap instant no-risk profits in the stock market." Id.; see Newman, 664 F.2d at 18.

  c. Scienter

  Although reckless deception satisfies the scienter requirement, Sirota v. Solitron Devices, Inc., 673 F.2d 566, 575 (2d Cir.), cert. denied, 459 U.S. 838, 74 L. Ed. 2d 80, 103 S. Ct. 86 (1982); IIT v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980), *fn48" there is abundant evidence that Tome acted knowingly and intentionally in connection with his fraudulent activity. His frantic trading and tipping on March 10th and 11th, together with his eloquent silence concerning his frantic trading in St. Joe options when meeting Bronfman socially on the evening of March 11th -- even though Bronfman was discussing with Tome the intimate details of the just-completed Seagram tender offer for St. Joe -- and his subsequent lies when questioned specifically whether he had a beneficial interest in any St. Joe trades, all lead inescapably to the conclusion that Tome acted knowingly and intentionally in connection with his fraudulent activity. See Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 167 (2d Cir. 1980)("One who deliberately tips information which he knows to be material and non-public to an outsider who may reasonably be expected to use it to his advantage has the requisite scienter.")(footnotes omitted).

  d. Materiality

  Tome clearly was in possession of material, nonpublic information when he breached his fiduciary or similar duty of trust and confidence to Seagram, its shareholders, and Bronfman by trading (and tipping). Information is material if there is a "substantial likelihood" that the information would be significant to a "reasonable investor" in making his or her investment decisions. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976)(defining materiality under proxy regulation Rule 14a-9); Elkind, 635 F.2d at 166 (applying the TSC standard to an action under Section 10(b) and Rule 10b-5, holding it to be "a relevant question in determining materiality . . . whether the . . . information . . . would have been likely to affect the decision of potential buyers and sellers.").

  Through the myriad disclosures by Bronfman to Tome concerning Seagram's confidential tender offer plans and potential targets, and the information concerning the Seagram parent company's Montreal Board meeting, Tome knew that Seagram's tender offer for St. Joe was imminent. Knowledge of an impending tender offer that has not previously been announced publicly is clearly material information. SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (2d Cir. 1976)(holding knowledge of a proposed merger to be material information in the context of an insider trading case). The significance of this information to investors is highlighted by the temporary halting of trading in St. Joe securities and by the virtually immediate jump in price of St. Joe stock from approximately $30 per share to approximately $45 per share when the Seagram tender offer was publicly announced on March 11. See Elkind, 635 F.2d at 166 (reaction of investors to the information is an indication of its materiality).

  2. Violation of Section 14(e) and Rule 14e-3

  The SEC argues that Tome (and the other defendants) also violated Section 14(e) and Rule 14e-3, 15 U.S.C. § 78n(e) and 17 C.F.R. § 240.14e-3, and that unlike a violation of Section 10(b) and Rule 10b-5, a violation of Rule 14e-3 does not require the SEC to prove scienter. See Caleb & Co. v. E.I. DuPont de Nemours & Co., 599 F. Supp. 1468, 1472-73 (S.D.N.Y. 1984)(holding that a violation of Rule 14e-1(c) does not require proof of scienter); Caleb & Co. v. E.I. DuPont de Nemours & Co., 615 F. Supp. 96, 99 (S.D.N.Y. 1985)(same, expressly citing Schreiber, at 101); cf. Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 105 S. Ct. 2458, 2464 n.11, 86 L. Ed. 2d 1 (1985)(stating that the SEC has "latitude to regulate nondeceptive activities" under Section 14(e)). But cf. id. at 2646 (stating that Section 14(e) is "modeled on the antifraud provisions" of Section 10(b) and Rule 10b-5). Since scienter is clearly present in this case, and since defendants' liability is clear under Section 10(b) and Rule 10b-5, it is unnecessary also to decide that defendants could be held liable without proof of scienter under Section 14(e) and Rule 14e-3. See Materia, 745 F.2d at 203 n.5.

  B. The Panamanian Defendants' Liability

  The Panamanian defendants, NICO, TFCO, and Finvest Panama, in a joint post-trial memorandum with Tome, concede that "there is no question but that Tome directed and controlled the transactions at issue as agent of the Panamanian corporations, and consequently, whatever information Tome utilized in causing the Panamanian defendants to engage in these transactions may properly be imputed to them." Defendants' (Tome, NICO, TFCO, Finvest Panama) Post-Trial Memorandum, at 53.

  We need not decide whether secondary liability can be imposed in this case upon the Panamanian defendants as controlling persons under Section 20(a), 15 U.S.C. § 78t(a), *fn49" since it is clear that common law agency concepts apply to violations of Section 10(b) and Rule 10b-5. Armstrong v. McAlpin, 699 F.2d 79, 92 (2d Cir. 1983); SEC v. Management Dynamics, Inc., 515 F.2d 801, 812 (2d Cir. 1975); but cf. id. at 813 ("We need not decide today whether the entire corpus of agency law is to be imported into the securities acts for all purposes."). Indeed, "since a corporation can act only through its agents," id. at 812, a corporation is liable, as a principal, for the actions of its responsible officers and authorized agents. A.J. White & Co. v. SEC, 556 F.2d 619, 624 (1st Cir.), cert. denied, 434 U.S. 969, 54 L. Ed. 2d 457, 98 S. Ct. 516 (1977); Verrecchia v. Paine, Webber, Jackson & Curtis, 563 F. Supp. 360, 364-65 (D. P.R. 1982). Since, as defendants concede, Tome had actual authority to purchase the St. Joe options at issue here, under general agency principles, the Panamanian defendants are equally liable for Tome's violations of Section 10(b) and Rule 10b-5.

  C. Leati and Lombardfin S.p.A.'s Liability

  Although defendants Tome, NICO, TFCO, and Finvest Panama, through counsel, have appeared in this action, Leati, Lombardfin S.p.A., and the Unknown Purchasers have not appeared.

  Originally, when this suit was filed in March 1981, the SEC was not then able to determine exactly who had engaged in the trades complained of, only that the trades had taken place. To an extent, particularly with the Unknown Purchasers, because of foreign secrecy laws, that problem still exists. When the SEC was able to determine exactly who was behind the trades, it amended the title of the suit, adding those additional defendants who had previously only been identified by category (i.e., as "Unknown Purchasers"). At trial, on October 23, 1985, this Court, by default, granted plaintiff SEC's motion to amend the title of the lawsuit to add Leati and Lombardfin S.p.A. as defendants. Leati's testimony was taken in Italy in October 1985 pursuant to the Letter Rogatory procedure. Before then, the testimony of Csopey, which incriminates Leati as an active participant in this illegal trading activity, had been taken in New York in September 1985. Leati and Lombardfin S.p.A., therefore, clearly were aware of the pendency of this litigation but chose not to participate in it. In addition, after this suit was filed, in May 1982 the SEC effected personal service on all defendants pursuant to Rule 4, Federal Rules of Civil Procedure, by publication of a Summons with Notice of the pendency of this suit in newspapers of general circulation in Europe, including the International Herald Tribune. Leati read the International Herald Tribune in 1981. [Csopey Tr. 122].

  Leati, as Tome's tippee, committed fraud within the meaning of Section 10(b) and Rule 10b-5 because, as the testimony of Csopey (admissible against Leati as a party admission) makes clear, Leati knew or should have known that Tome's disclosures to him were made in breach of Tome's fiduciary or similar duty of trust and confidence to Seagram, its shareholders, and Bronfman. Dirks, 463 U.S. at 660. Leati was a participant after the fact in Tome's fraudulent breach. Id. at 667; Chiarella, 445 U.S. at 230 n.12. For the same reasons as were stated when discussing Tome's liability, the fraud was "in connection with" Leati's purchase of St. Joe securities and the information was clearly material. Finally, Csopey's testimony makes it clear beyond peradventure of doubt that Leati had the requisite scienter, i.e., that he intentionally and knowingly participated in this fraudulent scheme to trade on inside information. Although it appears that Leati did in fact have a beneficial interest in at least some of the accounts for which he purchased St. Joe securities, he need not necessarily have had a beneficial interest in the accounts in order to be held liable under these antifraud provisions. If in fact any personal benefit is necessary to hold tippees liable under Section 10(b) and Rule 10b-5, *fn50" the commissions and reputational benefits Leati expected to enjoy from this fraudulent scheme clearly suffice. Leati is liable to account for the illegal St. Joe trades in which he engaged.

  Leati is Lombardfin S.p.A.'s founder, majority stockholder, vice-chairman of the Board of Directors, and general manager. In addition to an agency theory of liability, discussed previously in relation to the Panamanian defendants, the SEC urges that Lombardfin S.p.A. is liable for Leati's Section 10(b) and Rule 10b-5 violations under the doctrine of respondeat superior. See Marbury Management, Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.)(holding the doctrine applicable to a 10b-5 claim against a broker trainee who had held himself out as a broker and had accounted to his employer for all buying and selling transactions in which he had engaged), cert. denied sub nom., Wood Walker & Co. v. Marbury Management Inc., 449 U.S. 1011, 66 L. Ed. 2d 469, 101 S. Ct. 566 (1980); Moss v. Morgan Stanley Inc., 553 F. Supp. 1347, 1356-57 (S.D.N.Y.)(holding the doctrine inapplicable to an insider trading case since the unauthorized trading was not within the scope of employment), aff'd, 719 F.2d 5 (2d Cir. 1983), cert. denied sub nom., Moss v. Newman, 465 U.S. 1025, 79 L. Ed. 2d 684, 104 S. Ct. 1280 (1984); O'Connor, 529 F. Supp. at 1194 (same). But because of Leati's prominent position in Lombardfin S.p.A., it is not necessary to rely on the doctrine of respondeat superior to hold Lombardfin S.p.A. liable. In the context of a Rule 10b-5 claim, the Third Circuit appositely held that:

  

high ranking officers in a corporation, or partners in a partnership, present a different situation from lower level employees. Officers are able to make policy and generally carry authority to bind the corporation. Their action in behalf of the corporation is therefore primary, and holding a corporation liable for their actions does not require respondeat superior.

  Sharp v. Coopers & Lybrand, 649 F.2d 175, 182 n.8 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982). Because of Leati's violations of Section 10(b) and Rule 10b-5, Lombardfin S.p.A. is jointly liable for Leati's trading in St. Joe securities.

  D. BSI's Liability

  Two million dollars and 1,200 shares of Fluor Corporation stock plus dividends are frozen in BSI's account at Irving Trust Company pursuant to this Court's prior order. BSI also froze assets in its Lugano, Switzerland offices that had been credited as proceeds of St. Joe trades. Since Tome and the Panamanian defendants are liable under Section 10(b) and Rule 10b-5 for trading on inside information, and since proceeds from these defendants' direct purchases of St. Joe stock and options are frozen at BSI pursuant to this Court's prior order, the New York branch of BSI is hereby ordered to request that any proceeds of St. Joe trading frozen in its Lugano offices be transferred to the New York branch and thereafter paid into Court, to be included in the avails subject to the disgorgement directed hereafter. Additionally, BSI is ordered to pay the 1,200 shares of Fluor Corporation stock, proceeds from the illegal St. Joe trades, into the Court forthwith. Until these events have occurred, the freeze on the two million dollars in BSI's account at Irving Trust Company remains in effect.

  E. Unknown Purchasers

  The Court has been informed that the Government of Switzerland has frozen at least some Unknown Purchasers' accounts containing funds relating to the illegal St. Joe transactions discussed herein. The Court dismisses, and does not adjudicate, the claims of the SEC against the Unknown Purchasers, without prejudice to any subsequent action by the SEC to determine the identities of the Unknown Purchasers or to attempt to collect the Unknown Purchasers' profits from their unlawful St. Joe purchases. Additionally, the claims of the SEC not adjudicated herein are severed and discontinued, without prejudice, to the extent that it subsequently may be discovered that Tome, Leati, Lombardfin S.p.A., or the Panamanian defendants have a further beneficial interest in any funds or accounts of the Unknown Purchasers frozen by the Swiss Government or frozen in BSI's Lugano office or located in Guernsey.

  F. Remedies

  1. Disgorgement

  Defendants Tome, NICO, TFCO, and Finvest Panama contend that even if they are found to have violated the securities laws and regulations, disgorgement of ill-gotten gains is an inappropriate remedy in actions brought under the misappropriation theory. These defendants argue that since private plaintiffs themselves could not sue to recover these defendants' illegal profits (because of judicially-created standing requirements for a private cause of action under Rule 10b-5, see supra note 41), allowing the SEC to do so would constitute an unauthorized "penalty." In essence, these defendants argue that although they were caught violating the law and reaping millions of dollars in illegal profits in so doing, once caught they need not account to anyone for these illegal profits. Neither existing case law nor policy considerations supports such an inequitable result.

  In a Second Circuit decision on the misappropriation theory, the court affirmed the district court's order of disgorgement of ill-gotten gains, noting that "disgorgement of illegally obtained profits is by no means a new addition to this category of permissible equitable remedies [under Section 21(d)]." Materia, 745 F.2d at 201. And Congress, in enacting the enhanced penalties for insider trading under the ITSA, has recently underscored the importance of the disgorgement remedy in SEC injunctive actions:

  

The principal, and often effectively [the] only, remedy available to the Commission against insider trading is an injunction against further violations of the securities laws and disgorgement of illicit profits.

  ITSA House Report, supra, at 7, reprinted in 1984 U.S. Code Cong. & Ad. News at 2280. In enacting these increased sanctions, Congress expressed its belief that disgorgement of illegal profits was insufficient to deter insider trading:

  

Disgorgement of illegal profits has been criticized as an insufficient deterrent, because it merely restores a defendant to his original position without extracting a real penalty for his illegal behavior. The risk of incurring such penalties often fails to outweigh the temptation to convert nonpublic information into enormous profits.

  Id. at 7-8, reprinted in 1984 U.S. Code Cong. & Ad. News at 2280-81. If the Congress believes that even full disgorgement of profits is an insufficient deterrent to insider trading, a fortiori less than full disgorgement, or as the defendants argue, none, is even more ineffectual. Long ago, in the first court of appeals decision ordering disgorgement in an SEC enforcement action, the Second Circuit recognized that those who trade on inside information are simply after quick, no-risk profits, and therefore that the most effective means to deter such behavior is to make the activity unprofitable. Texas Gulf Sulphur, 446 F.2d at 1308 ("It would severely defeat the purposes of the [Exchange] Act if a violator of Rule 10b-5 were allowed to retain the profits from his violation."); see also CFTC v. British American Commodity Options Corp., 788 F.2d 92, 94 (2d Cir. 1986)("disgorgement serves the purpose of depriving the wrongdoer of his ill-gotten gains and deterring violations of law."); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972)("The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable.").

  At bottom, the defendants' arguments rest on the proposition that the SEC stands in the shoes of private litigants in bringing this injunctive proceeding. Such an assertion, however, was affirmatively rejected in SEC v. Petrofunds, Inc., 420 F. Supp. 958, 960 (S.D.N.Y. 1976):

  

[There is a] critical distinction between actions brought by the SEC and actions brought by private litigants. Regardless of the fact that defendants may be required to disgorge profits, the SEC in no way stands in the shoes of a private litigant with respect to its claims for ancillary relief.

  See also Management Dynamics, 515 F.2d at 808 ("the SEC appears in these proceedings not as an ordinary litigant, but as a statutory guardian charged with safeguarding the public interest in enforcing the securities laws."). Disgorgement, therefore, is an appropriate, indeed an essential, remedy in an SEC enforcement action based on a misappropriation theory of insider trading liability.

  The defendants found liable herein shall account for and disgorge all profits and dividends received or credited, plus interest at the average prime rate from March 11, 1981 to the date of this Opinion, from any purchases of St. Joe stock or options between February and March 11, 1981. Defendant Tome is liable (1) individually, for accounts in which he held any economic, beneficial, or discretionary interest, and (2) jointly and severally with his tippees, the Panamanian defendants (NICO, TFCO, Finvest Panama), Leati, and Lombardfin S.p.A., for accounts in which those tippees, direct and secondary, held any economic, beneficial, or discretionary interest. Without limiting the scope of liability, Tome is liable for all profits and dividends, plus interest, from all St. Joe stock and option purchases discussed in this Opinion. Tome's liability is joint and several with that of the Panamanian defendants for the St. Joe options purchased for the NICO, TFCO, and Finvest Panama accounts at BSI, and with Leati and Lombardfin S.p.A. for the St. Joe stock and option purchases placed by Leati or his subordinates for Lombardfin S.p.A.'s clients. These defendants are ordered to pay these amounts into the Court to be included in the amount subject to disgorgement. The decree to be submitted herein should set forth a plan for disgorgement and administration of the fund to be created, taking due account of similar plans previously utilized in like decisions.

  2. Permanent Injunction

  Once the SEC has proven a defendant's violation of the securities laws and regulations, it makes a "proper showing" for permanent injunctive relief, within the meaning of Section 21(d), by demonstrating, by a preponderance of the evidence, a "reasonable likelihood that the wrong will be repeated." Manor Nursing Centers, 458 F.2d at 1100-01; see also Management Dynamics, 515 F.2d at 807. In determining whether a permanent injunction is appropriate, a "district court is called upon to assess all those considerations of fairness that have been the traditional concern of equity courts." Manor Nursing Centers, 458 F.2d at 1102; see also Management Dynamics, 515 F.2d at 807 ("Whether the inference that the defendant is likely to repeat the wrong is properly drawn, however, depends on the totality of the circumstances . . ."); see also SEC v. Monarch Fund, 608 F.2d 938, 943 (2d Cir. 1979); SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 99 (2d Cir. 1978); SEC v. Bausch & Lomb, Inc., 565 F.2d 8, 18 (2d Cir. 1977); CFTC v. U.S. Metals Depository Co., 468 F. Supp. 1149, 1161-62 (S.D.N.Y. 1979). The Second Circuit has provided additional guidance by enumerating specific factors the court should consider in making this determination:

  

The factors which [a district judge] may consider include the likelihood of future violations, the degree of scienter involved, the sincerity of defendant's assurances against future violations, the isolated or recurrent nature of the infraction, defendant's recognition of the wrongful nature of his conduct, and the likelihood, because of defendant's professional occupation, that future violations might occur.

  SEC v. Universal Major Industries Corp., 546 F.2d 1044, 1048 (2d Cir. 1976), cert. denied sub nom., Homans v. SEC, 434 U.S. 834, 54 L. Ed. 2d 95, 98 S. Ct. 120 (1977).

  Applying these factors to this case, it is clear that the SEC is entitled to injunctive relief against defendants Tome, the Panamanian defendants, Leati, and Lombardfin S.p.A. and this court so orders. Tome acted intentionally in deceiving Bronfman and Seagram, abusing his position of trust and confidence, eventually lying about his activities when questioned specifically. SEC v. Aaron, 605 F.2d 612, 624 (2d Cir. 1979)("the [district] court's finding that appellant acted with scienter underscore[s] the need for an injunction."), vacated on other grounds, 446 U.S. 680, 100 S. Ct. 1945, 64 L. Ed. 2d 611 (1980). Tome not only traded for himself, but tipped others to encourage them to engage in illegal conduct. In fact, the evidence indicates that, before the St. Joe trades forming the basis of this suit, Tome had engaged in other trades on inside information confidentially disclosed by Bronfman concerning Seagram's tender offer plans. Tome has not indicated any remorse for his actions, except in being caught. He has remained outside the United States to avoid prosecution on a related criminal charge. In addition, his position as a broker and financial advisor would enable him to violate the law again.

  The Panamanian defendants have not admitted their complicity in this scheme either. Tome has a beneficial interest in these accounts, and had discretionary power over them. Finvest Panama is part of Tome's Finvest Group, his financial network. Should Tome attempt to violate the law again, it appears likely that he would attempt to use these corporate entities to do so.

  Leati acted intentionally in engaging in the St. Joe trades on the basis of Tome's inside information. Indeed, there is evidence in the record that Leati previously traded on Tome's inside information. He has expressed no remorse for what he did; in fact, he has refused to appear in this action. His position as a broker and financial advisor would enable him to violate the law again.

  As discussed previously, Lombardfin S.p.A. is dominated by Leati, both as owner and as manager. Csopey testified that other high-ranking officials of Lombardfin S.p.A. knew about the illegal trading shortly after its occurrence but did nothing to rectify the situation. Should Leati attempt to violate the law again, it appears likely that he would attempt to use Lombardfin S.p.A. to do so.

  For these reasons, Tome, NICO, TFCO, Finvest Panama, Leati, and Lombardfin S.p.A. are permanently enjoined from violating the antifraud provisions of the United States securities laws and regulations.

  The foregoing shall constitute the findings of fact and conclusions of law required under Rule 52(a), Federal Rules of Civil Procedure. A decree in separate form, without reciting the prior proceedings, see Rule 54, should be submitted on ten (10) days notice, within thirty (30) days hereof.

  So Ordered.


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