463 U.S. at 653.
The misappropriation theory only bars trading on such information where
the defendant violates a direct fiduciary or contractual duty to the
holder of the "inside" information. See id. Thus, in United States v.
O'Hagan, 521 U.S. 642 (1997), the Supreme Court affirmed the
misappropriation theory in a case with the same basic facts as those
presented here: an alleged tipper who was a lawyer in a firm retained in
connection with a proposed tender offer. The O'Hagan Court upheld
liability for outsiders who pass on tips of inside information on the
grounds that "a fiduciary's undisclosed, self-serving use of a
principal's information to purchase or sell securities, in breach of a
duty of loyalty and confidentiality, defrauds the principal of the
exclusive use of that information." 521 U.S. at 652.
To show that the defendants violated the antifraud provisions of the
Exchange Act, the SEC must show that they acted with scienter, a state of
mind that embraces the intent to deceive, manipulate or defraud. Aaron
v. SEC, 446 U.S. 680, 686, n. 5, 700-01 (1980); Ernst & Ernst v.
Hochfelder, 425 U.S. 185 (1976).
Scienter may be established by showing recklessness, see, e.g., SEC v.
McNulty, 137 F.3d 732 (2d Cir. 1998), or by inferences based upon
circumstantial evidence, see Herman & MacLean v. Huddleston, 459 U.S. 375,
As a general matter, insider trading cases hold that a duty arises in
cases where the person is an "insider," see, e.g., SEC v. Texas Gulf
Sulphur Co., 401 F.2d 833 (2d Cir. 1968), a "temporary insider," see,
e.g., SEC v. Lund, 570 F. Supp. 1397 (C.D.Cal. 1983), an employee
entrusted with confidential information by his employer, see, e.g., SEC
v. Materia, 745 F.2d 197 (2d Cir. 1984), or a tippee of any of the above
who knew or should have known that the information was obtained in breach
of a duty, see Dirks, 463 U.S. at 660.
In misappropriation cases, the outsider-tipper's duty arises from his
relationship to the source of the information rather than to the
corporation's shareholders. See O'Hagan, 521 U.S. at 652-53 ("the
misappropriation theory outlaws trading on the basis of nonpublic
information by a corporate `outsider' in breach of a duty owed not to a
trading party, but to the source of the information.").
Here, the SEC alleges that the source of the inside information was
either Rafael Robles, or, more generally, the law firm of Franck,
Galicia. Alejandro Duclaud, like any other attorney, owed a fiduciary
duty to his law firm. See id., 521 U.S. at 659-60 (noting, without
analyzing derivation of duty, that lawyer's deceptive trading based upon
confidential information learned from law firm breached a fiduciary
duty); Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 N.Y.2d 112,
629 N.Y.S.2d 1009, 1012, 653 N.E.2d 1179 (1995) (noting that, under New
York law, "law partners, no less than any other business or professional
partners, are bound by a fiduciary duty requiring `the punctilio of an
honor the most sensitive'") (quoting Meinhard v. Salmon, 249 N.Y. 458,
463, 164 N.E. 545 (1928)).
2. Liability of Misappropriator for Trading and Tipping
To hold Alejandro Duclaud liable for his own CompUSA trades under the
misappropriation theory, the SEC must show
that he traded in securities
while in knowing possession of material, nonpublic information in
violation of a fiduciary duty to the source of the information. Id.
Alejandro Duclaud may also be held liable for "tipping" if the SEC shows
that he passed material, non-public information to another defendant in
violation of his fiduciary duties. See United States v. McDermott,
245 F.3d 133, 138 (2d Cir. 2001); United Staets v. Cusimano, 123 F.2d 83,
87 (2d Cir. 1997), cert. denied, 522 U.S. 1133 (1998).
3. Liability of Tippees
The SEC may establish liability on the part of any of the other
individual defendants as "tippees" by showing that they received
information from Alejandro Duclaud, the alleged "tipper," and that
Duclaud "receive[d] a direct or indirect personal benefit from the
disclosure, such as pecuniary gain or a reputational benefit that will
translate into future earnings . . . [or that Duclaud made] a gift of
confidential information to a [defendant who is Duclaud's] trading
relative or friend." Dirks, 463 U.S. at 663-64.
B. Section 14(e) and Rule 14e-3
Section 14(e) of the Exchange Act and Rule 14e-3 promulgated thereunder
similarly bar trading on inside information in the context of an
impending tender offer. To establish liability pursuant to Rule 14e-3,
the SEC must show that the defendants traded on the basis of material,
non-public information concerning a pending tender offer that they knew,
or had reason to know, had been acquired directly or indirectly from an
insider of the offeror or issuer or someone working on their behalf. Rule
14e-3, 17 C.F.R. § 240.14e-3(a); see also O'Hagan, 521 U.S. 642.
Unlike 10b-5 liability, the SEC need not establish that the information
was disclosed in breach of a fiduciary duty to make out a violation of
Rule 14e-3, id., 521 U.S. at 670-72; Mayhew, 121 F.3d at 49, but must
nonetheless show that A. Duclaud had access to material, non-public
information pertaining to a tender offer, and that he traded on it and/or
passed it on to other defendants, who in turn relied on it in trading in
CompUSA stock. Rule 14e-3 liability attaches when "`substantial step or
steps' have been taken to accomplish a tender offer" in a setting that is
shielded from public scrutiny. Id., 121 F.3d at 53.
II. Applicable Legal Standard for Obtaining a Preliminary
Injunction in an SEC Action
Section 21(d) of the Exchange Act authorizes the SEC to seek permanent
or temporary injunctive relief whenever it appears that a person "is
engaged or is about to engage in acts or practices constituting a
violation of [the Act]." 15 U.S.C. § 78u(d). District courts may
grant such relief "upon a proper showing," id., which, as set forth
below, depends on the nature of the relief sought, see Unifund, 910 F.2d