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SEC v. DOWNE

June 17, 1997

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, against EDWARD R. DOWNE, JR., STEVEN A. GREENBERG, MARTIN REVSON, DAVID SALAMONE, FRED R. SULLIVAN, THOMAS WARDE, MILTON WEINGER and BROADSWORD, LTD., Defendants.


The opinion of the court was delivered by: SCHEINDLIN

 SHIRA A. SCHEINDLIN, U.S.D.J.:

 After a three day jury trial, defendant Thomas Warde ("Warde") was found liable for insider trading in violation of §§ 10(b) and 14(3) of the Securities and Exchange Act of 1934, and Rules 10b-5 and 14e-3 thereunder. Defendant now moves for judgment notwithstanding the verdict under Fed. R. Civ. P. 50(b). The Securities and Exchange Commission ("SEC") moves for a permanent injunction, and for an order directing disgorgement, assessing prejudgment interest, and imposing a civil penalty of three times the gross profits of all trades resulting from the use of inside information. For the reasons set forth below, defendant's motion is denied. A permanent injunction will issue against Warde. Warde will also make a disgorgement in the amount of $ 871,725, on which Warde will pay prejudgment interest of $ 1,264,501, based on the Internal Revenue Service rate used for underpayment of taxes. Finally, Warde will pay a penalty of $ 871,725.

 I. FACTUAL BACKGROUND

 This case arises from substantial trading in warrants to purchase the common stock of Kidde, Inc. ("Kidde") during a period in 1987 when control of Kidde was in flux. At trial, the SEC contended that Warde purchased Kidde warrants while in possession of material, non-public information about a tender offer for Kidde securities. The SEC further contended that Warde received this information from Edward Downe ("Downe"), a Kidde Director throughout the relevant period. Warde is also alleged to have tipped his brother Gregory Warde, who also traded on the information.

 Edward Downe became a Kidde Director in 1986, at the request of his friend Fred Sullivan ("Sullivan"), President of Kidde for over twenty years. See Tr. 65-66, 73-74, 142. In early June 1987, Sullivan had consulted with Bear Stearns Companies, Inc. ("Bear Stearns") about a restructuring or leveraged buyout of Kidde. On June 17, in a confidential report, Bear Stearns advised Sullivan that Kidde's management could acquire Kidde by paying shareholders between $ 43 and $ 47 per share. See Court Exhibit ("CX") 2, P 8; Plaintiff's Exhibit ("PX") 2. During this period, however, the price of Kidde common stock had risen from $ 34 to $ 41 per share as a result of an increase in buying activity.

 From early June through June 26, the price of Kidde common stock and warrants continued to rise, and trading volume steadily increased. PX 67. Sullivan and Bear Stearns learned that Rothschild, Inc. was acting as an agent for a secret buyer, and suspected the buyer was Hanson Trust, PLC ("Hanson"). CX 2, P 14; Tr. 93. Kidde, through Bear Stearns and Lazard Freres & Co., Inc., began to contact possible suitors for a possible sale of Kidde. CX 2 PP 9-13; Tr. 92-98. During the week of June 21, press reports indicated that Kidde was "in play". Tr. 123-24, 206-08, 309-10. Kidde began negotiating with prospective buyers the following week, CX 2, P 15, and Sullivan began contacting Directors for an emergency board meeting to discuss the takeover. On July 7, 1987, Kidde publicly announced that it had formally retained investment bankers, was considering restructuring or buyout options, and was negotiating with potential suitors. PX 6. On July 31, Hanson submitted an offer to purchase Kidde, PX 13, and the two companies entered into a merger agreement on August 4. PX 16. The following day, the two companies issued a joint press release announcing the merger. PX 17.

 At significant junctures in this chain of events, both Downe and Warde purchased Kidde warrants -- purchases that would prove very lucrative in light of the takeover developments at Kidde. At trial, Downe denied being in possession of any non-public information at the time he made his purchases, and denied passing any such information to Warde. Both Warde and Downe asserted at trial that they purchased Kidde warrants based on their own knowledge of the securities markets, and on the basis of information received from friends or investment advisors with no fiduciary relationship to Kidde. Relying on largely circumstantial evidence, the SEC contended that Downe, after learning non-public information from Sullivan directly and from attendance at Kidde board meetings, tipped Warde, who in turn tipped his brother Gregory. At the close of the evidence, Warde moved for judgment as a matter of law pursuant to Fed.R.Civ.P. 50(a). That motion was denied, and both claims were submitted to the jury. Defendant renews that motion now. The SEC asks for various forms of equitable relief.

 II. Motion for Judgment as a Matter of Law Under Rule 50(b)

 A Rule 50(b) motion should only be granted in circumstances where there is

 
either an utter lack of evidence supporting the verdict, so that the jury's findings could only have resulted from pure guess-work, or the evidence must be "so overwhelming that reasonable and fair-minded persons could only have reached the opposite result."

  Doctor's Assoc., Inc. v. Weible, 92 F.3d 108 (2d Cir. 1996) (quoting Baskin v. Hawley, 807 F.2d 1120, 1129 (2d Cir. 1986)), cert. denied, 136 L. Ed. 2d 713, 117 S. Ct. 767 (1997); see also Samuels v. Air Transport Local 504, 992 F.2d 12, 14 (2d Cir. 1993). The movant cannot simply argue that the evidence "was thin," Song v. Ives Laboratories, Inc., 957 F.2d 1041, 1047 (2d Cir. 1992), but rather must show that "'there can be but one conclusion as to the verdict that reasonable [persons] could have reached'" id. at 1046 (quoting Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir. 1970)). A court must view the evidence in the light most favorable to and draw all reasonable inferences in favor of the non-moving party, and is not permitted to weigh the evidence or assess witness credibility. Bergstein v. Jordache Enterprises, Inc., 1996 U.S. Dist. LEXIS 6894, No. 90 Civ. 1461, 1996 WL 271910 at *1 (S.D.N.Y. May 21, 1996); see also United States ex rel. Evergreen Pipeline Constr. Co. v. Merritt Meridian Constr. Corp., 95 F.3d 153, 164-65 (2d Cir. 1996) (under Rule 50(b), both appellate court and district court must view evidence in favor of non-movant, giving non-movant benefit of all inferences, and may not weigh evidence or credibility of witnesses). For this Court to uphold the jury's verdict against Warde under § 10(b) and Rule 10b-5, there must be record evidence that: 1) Downe was in possession of material, non-public information regarding Kidde; 2) Warde traded in Kidde warrants while in possession of the information relayed to him by Downe; 3) Warde knew or should have known that Downe had violated a trust relationship in passing on the information, and 4) Downe personally benefitted from his disclosure to Warde. See Dirks v. Securities and Exchange Comm., 463 U.S. 646, 654-664, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983). To uphold the jury's verdict under § 14(e) and Rule 14e-3, there must be evidence of the first three elements, but personal benefit to the tipper is not required. United States v. Chestman, 947 F.2d 551, 563 (2d Cir. 1991).

 A. Downe's Possession of Material, Non-Public Information

 Drawing all inferences in the SEC's favor, there was more than ample circumstantial evidence from which the jury could reasonably conclude that Downe possessed material, non-public information. During early June 1987, when Sullivan was exploring restructuring or a leveraged buyout with Bear Stearns, Downe purchased 52,000 publicly traded warrants to purchase Kidde common stock at $ 40 per share, allegedly on the advice of his broker, Milton Weinger. PX 61, 62; Tr. 173. These warrants expired in November 1987, less than six months later, guaranteeing that their sale would place Downe squarely in violation of the short-swing profits rule. Downe, fully aware of this prohibition, Tr. 242-43, sought to evade the rule by purchasing warrants in securities accounts of a company owned by his son, Educated & Dedicated Service Corp., and in a Bermuda company he jointly owned, Broadsword, Ltd. Tr. 139-40, 148-49, 243. Indeed, Downe violated the short-swing profits rule when he sold the warrants during June 1987 at a profit of approximately $ 43,000. Tr. 169. Downe's attempts to conceal his purchases from the SEC supports an inference that Downe was in possession of inside information when he made these trades.

 Downe made substantial purchases of Kidde warrants over the next month and a half, totaling over $ 4 million. At trial, the SEC established that the timing of Downe's purchases coincided with contact between Downe and Sullivan immediately following major developments in the takeover process. On Sunday June 28, Sullivan, in a departure from his usual business practice, met with Bear Stearns representatives at his Easthampton home to discuss the potential takeover and Sullivan's options to sell Kidde. Tr. 105-06. He visited Downe in Southampton later that day, and was visibly depressed. Tr. 176. Although Sullivan and Downe denied that any material, non-public information was imparted to Downe, it was Sullivan's practice to keep Directors such as Downe informed of developments at Kidde between formal board meetings, Tr. 69-70, 100-01, and in addition, the two men were close friends. Sullivan, at this point, was facing the loss of a company of which he had been President for over twenty years, and was meeting with a good friend and Kidde Director literally moments after receiving bad news about Kidde, circumstances that strongly suggest that Sullivan and Downe discussed Kidde. That evening, Downe directed his broker to purchase $ 750,000 in Kidde warrants for Educated and Dedicated, his friends' accounts, *fn1" as well as directing his partner David Salamone to buy warrants in the offshore Broadsword accounts. Tr. 178-80. Like his prior purchases of Kidde warrants, these purchases were designed to conceal his involvement, and, Downe testified, ...


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