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S.E.C. v. WILLIS

November 15, 1991

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
ROBERT H. WILLIS, MARTIN B. SLOATE, HOWARD KAYE AND KENNETH STEIN, DEFENDANTS.



The opinion of the court was delivered by: William C. Conner, District Judge:

  OPINION AND ORDER

This matter is before the Court on the motion of defendant Martin B. Sloate ("Sloate") to dismiss the Complaint filed by the Securities and Exchange Commission (the "SEC") against Sloate and three other defendants, Robert H. Willis ("Willis"), Howard Kaye ("Kaye"), and Kenneth Stein ("Stein"), who are no longer parties to the suit.*fn1 The action was brought by the SEC under the authority of Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78u(d), and seeks an injunction and other ancillary relief, including disgorgement of profits and civil penalties under the Insider Trading Sanctions Act of 1984 ("ITSA"), 15 U.S.C. § 78u-1(a)(1)(A), against Sloate, based on his alleged violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Sloate moves the Court for dismissal of the Complaint pursuant to Fed.R.Civ.P. Rule 12(b)(6), for failure to state a claim upon which relief may be granted, and under Fed.R.Civ.P. Rule 9(b), for failure to allege fraud with particularity. As additional reasons for dismissal, Sloate contends that maintenance of this action against him violates due process and that the claims against him should be dismissed as untimely.

Background

For purposes of the pending motion, the Court has assumed the facts alleged in the SEC's complaint to be true. The Complaint alleges that Willis, a psychiatrist, breached his fiduciary duty to a patient, Joan Weill, the wife of Sanford Weill, when he traded while in possession of certain of Mrs. Weill's patient confidences, consisting of material, nonpublic information about her husband's involvement in confidential corporate matters. Complaint at ¶¶ 15-17. In 1981, she confided in Willis information about the imminent merger of Shearson Loeb Rhoades ("Shearson"), of which her husband was Chief Executive Officer ("CEO"), and American Express Company (the "Shearson merger") (Complaint ¶¶ 18-21); and, in 1986, she related information about Weill's interest in, and efforts to take over, BankAmerica Corp. ("BankAmerica") (Complaint ¶¶ 40-42, 47).

Commencing on or about April 3, 1981, Willis communicated to Sloate material, nonpublic information about the Shearson merger which Willis had obtained in confidence from Mrs. Weill. Complaint at ¶ 25. From on or about April 9 through 14, 1981, Sloate, while in possession of the information, traded in Shearson securities for his own account and for at least two of his customer accounts. Complaint at ¶ 27-28. Commencing on or about January 14, 1986, Willis communicated to Sloate material, nonpublic information about Weill's BankAmerica plans which Willis had obtained in confidence from Mrs. Weill. Complaint at ¶ 52. From on or about January 22, 1986 through on or about February 11, 1986, while in possession of the information, Sloate traded in BankAmerica securities for his own account and on behalf of his customers. Complaint at ¶¶ 55, 57.

The Complaint further alleges that (1) Sloate tipped Stein, his customer and friend, confidential information about both the Shearson merger and Weill's BankAmerica plans (Complaint at ¶¶ 30, 63), and (2) he tipped Kaye, his friend and neighbor, about Weill's BankAmerica plans (Complaint at ¶ 60). Sloate allegedly communicated to Stein and Willis that the information had been obtained from a friend who was a psychiatrist, and that the psychiatrist's source of that information was a Willis patient who was a Weill family member. Complaint at ¶¶ 30, 60, 63. Sloate is alleged to have earned profits and commissions on the purchases and sales of the Shearson and BankAmerica stock for himself and for his customers. Complaint at ¶¶ 32, 36, 38, 56, 58.

Discussion

Failure to State a Claim

In considering a motion to dismiss the complaint under Fed.R.Civ.P. Rule 12(b)(6), the court "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). In order to prevail on a motion to dismiss, the moving party must demonstrate "beyond doubt that the [non-moving party] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 105 S.Ct. 1845, 85 L.Ed.2d 144 (1985). A court must accept as true the factual allegations accompanying the complaint and draw all reasonable inferences in favor of the nonmoving party. See Cosmas v. Hassett, 886 F.2d 8, 12 (2d Cir. 1989).

Defendant first argues that the complaint fails to state a cognizable claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder.*fn2 In order to withstand a motion to dismiss in an action charging a violation of Section 10(b) under the misappropriation theory, the Complaint must allege that (1) the defendant converted material, nonpublic information, (2) in breach of a fiduciary duty, (3) in connection with the purchase or sale of securities, and (4) the defendant acted with scienter. United States v. Carpenter, 791 F.2d 1024, 1028-29 (2d Cir. 1986), aff'd by an equally divided Court, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987); United States v. Willis, 737 F. Supp. 269, 272-73 (S.D.N.Y. 1990); SEC v. Musella, 748 F. Supp. 1028, 1036 (S.D.N.Y. 1989), aff'd, 898 F.2d 138 (2d Cir.), cert. denied, DeAngelis v. SEC, ___ U.S. ___, 111 S.Ct. 57, 112 L.Ed.2d 32 (1990). Where the defendant is a tippee, the Complaint must further allege that the tippee traded on the misappropriated information when he knew or should have known it was misappropriated. Carpenter, 791 F.2d at 1032; Musella, 748 F. Supp. at 1037.

A. Scienter

The defendant contends that even assuming the misappropriation theory applies to Willis, the Complaint does not allege a factual basis from which to infer that Sloate knew or should have known that Willis's communications were the result of a breach of a fiduciary duty owed to Mrs. Weill. Defs.Mem. at 1. The Court cannot agree. The Complaint alleges that Willis communicated to Sloate material, nonpublic information about the Shearson merger and Weill's BankAmerica plans which Willis had obtained in confidence from Mrs. Weill. The Complaint also alleges that Willis told Sloate "that the source of the information was a patient under Willis's care who was a member of the Weill family" (Complaint at ¶¶ 25, 52), and that Sloate knew, or was reckless in not knowing, that the information had been misappropriated by Willis in breach of a duty to a patient (Complaint at ¶¶ 39, 59). The Complaint, as defendant points out, does not specifically state that Willis told Sloate that the information was given to him in confidence by Mrs. Weill or that Willis was breaching his ethical responsibilities to Mrs. Weill; however, it does allege facts from which such knowledge on defendant's part may be inferred.

B. Materiality

The defendant next argues that the SEC's Complaint is deficient in that it fails to state how the alleged nonpublic information regarding Weill's BankAmerica plans was "material." Defs.Mem. at 30. The Complaint alleges that in January or February of 1986, Mr. Weill "was considering a proposal to change the management of BankAmerica, including becoming its Chief Executive Officer." Complaint at ¶ 40. It also alleges that Weill was engaged in confidential discussions concerning these plans and his steps to secure a commitment from Shearson to invest capital in BankAmerica if, among other things, Weill succeeded in becoming the CEO. Complaint at ¶¶ 40-41. In or about January of 1986, Weill apparently disclosed this information to Mrs. Weill. Complaint at ¶ 42. The Complaint ...


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