The Amended Complaint alleges that the Trust defendants were controlled and dominated by Jorge Ballesteros to such a large extent that the illicit activities and knowledge of Jorge Ballesteros should be imputed to them.*fn3 The Trust defendants do not argue that the allegations in the Amended Complaint are insufficient to hold Jorge Ballesteros liable for insider trading. Instead they argue that there is simply no basis for holding trust entities liable under the securities laws for violations that were perpetrated by an individual merely associated with those entities. They argue that there is no case, or theory of liability for that matter, that holds that the Trust defendants can be liable for the illegal activity of Jorge Ballesteros under the relevant statutes and rules.
These arguments lack merit. While it is true that neither party has found a case in which a trust was held liable for insider trading under circumstances similar to this case, the allegations in the Amended Complaint are sufficient to survive the Trust defendants' motion to dismiss.*fn4
The Court of Appeals for the Second Circuit has held that a person's knowledge can be attributed to a corporation in connection with actions which that person through his control causes the corporation to take. Hence, in S.E.C. v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972), the Court of Appeals found that two corporate defendants, Glendale, Inc., and Atlantic Services, Inc., were liable for violations of the securities laws, including § 10(b) and Rule 10b-5, because they were "corporate embodiments" of an individual defendant, "and his awareness of the securities law violations [is] imputed to them." Id. at 1089 n. 3. The Court also noted that the individual's knowledge "is imputed to the corporation which he controlled . . ." Id. at 1096 n. 17. The Court of Appeals cited S.E.C. v. North Am. Research and Development Corp., 424 F.2d 63 (2d Cir. 1970) where the Court upheld the liability of a corporation for violations of the securities laws including § 10(b) and Rule 10b-5 where "the corporation was little more than the personification" of an individual defendant and others. Id. at 79.
This principle is consistent with the self-evident proposition that a corporation can act only through the actions of natural persons and that the actions of its agents, acting within the scope of their agency, are attributed to the corporation. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) (liability of bank for violations of § 10(b) and Rule 10b-5 is co-extensive with that of its employees who devised a scheme to defraud); S.E.C. v. Lum's Inc., 365 F. Supp. 1046, 1061 (S.D.N.Y. 1973) (noting "it is difficult to conceive of a corporation acting in any other way than by its managing officers and directors"); Am. Gen. Ins. Co. v. Equitable Gen. Corp., 493 F. Supp. 721, 747 (E.D.Va. 1980)(noting that "a corporate entity . . . can act only through its officers and duly authorized agents").
While the Trust defendants argue that trust entities cannot be held liable for securities fraud, they provide no persuasive reason to explain why trusts are to be treated differently from corporations, estates, or other entities that have been held liable under Rule 10b-5 and Rule 14e-3 based on the activities of individuals who dominate or control those entities. Trusts, like corporations, must make their decisions through individuals. See S.E.C. v. Moskowitz, No. 97 Civ. 7174 (HB), 1998 WL 524903, at *4 (S.D.N.Y. Aug. 20, 1998). And where an individual so dominates or controls the activities of some entity such as the trust, the entity may also be held responsible for the same acts committed by the individual. See, e.g., id., 1998 WL 524903, at *4.*fn5
In this case it is alleged that the Trust defendants were dominated by Jorge Ballesteros and did his bidding to violate the securities laws and thereby to obtain substantial profits for the trusts. The Amended Complaint alleges, based on the theory of tippee liability, that Jorge Ballesteros knowingly violated Rule 10b-5 and Rule 14e-3. Jorge Ballesteros' activities and his relationship with the Trust defendants indicates that the Trust defendants were controlled and dominated by Jorge Ballesteros. Specifically, it is alleged, among other things, that Cardinal Trust and Gianni Trust were established for the benefit of Jorge's close relatives, that Jorge was the only individual to ever recommend investment instructions to the trusts, that the trusts never declined to follow Jorge's investment instructions, and that Jorge was either the primary, or secondary, beneficiary of these trust assets.*fn6 (Compl.¶¶ 11, 13, 14, 63, 64.) Moreover, Jorge Ballesteros used the assets of Cardinal Trust and Gianni Trust, and their wholly owned investment companies, to effectuate the trades and to generate illegal profits. (Compl.¶¶ 55-65.) It could be argued based on the allegations in the Complaint that for the purposes of the illegal transactions, the Trust defendants had no autonomous and separate existence outside of Jorge Ballesteros. Under these circumstances, it cannot be said either that to impute the knowledge of Jorge Ballesteros to the Trust defendants would be improper as a matter of law or that the Trust defendants may not be independently liable for violations of the relevant statutes and rules.*fn7 The Trust defendants stand in the same position as those corporations that have been held liable for securities fraud based on the knowledge attributed to them from those who controlled them. At this stage of the litigation, the SEC has alleged sufficient facts to warrant imputing the knowledge and acts of Jorge Ballesteros to the Trust defendants, and to state a claim for the violation of the relevant statutes and rules.*fn8 See Moskowitz, at *4 (denying defendant's motion to dismiss and finding that trust could be held independently liable for securities fraud for illegal activity of trustee perpetrated through trust funds).*fn9
The Trust defendants have consistently argued that because there has been complete disgorgement of all of the illegal profits from the insider trading activities attributed to the insider information obtained by Jorge Ballesteros, the Trust defendants can and should not be held independently liable for securities fraud. This argument has no merit. A district court has broad equitable power to fashion appropriate remedies for a violation of the federal securities laws. Manor Nursing Centers, Inc., 458 F.2d at 1103. The remedies that plaintiffs are permitted to purse under the securities laws are broader than disgorgement. In this action, the SEC does not seek disgorgement, but injunctive relief and civil penalties pursuant to 15 U.S.C. § 78u-1. Civil penalties as well as injunctive relief may be obtained in an action under the securities laws, even if the court has also ordered disgorgement. See, e.g., S.E.C. v. Berger, No. 00 Civ. 333, 2001 WL 1403028, at *9-10 (S.D.N.Y. Nov. 13, 2001); S.E.C. v. Rosenfeld, No. 97 Civ. 1467WHPRLE, 2001 WL 118612, at *4 (S.D.N.Y. Jan. 9, 2001). Civil penalties and injunctive relief deter future violations of the securities laws, which an order of disgorgement, standing alone, cannot accomplish. As the House Report for the civil penalty provision stated:
Disgorgement merely requires the return of wrongfully
obtained profits; it does not result in any actual
economic penalty or act as a financial disincentive
to engage in securities fraud. A violator who avoids
detection is able to keep the profits resulting from
illicit activities. Currently, even a violator who is
caught is required merely to give back his gains with
interest, leaving him no worse off financially than
if he had not violated the law. The Committee
therefore concluded that authority to seek or impose
substantial money penalties, in addition to the
disgorgement of profits, is necessary for the
deterrence of securities law violations that
otherwise may provide great financial returns to the
H.R.Rep. No. 101-616, 101st Cong., 2d Sess., reprinted in 1990 U.S.C.C.A.N. 1379, 1384-86 (quoted in S.E.C. v. Coates, 137 F. Supp.2d 413, 428-29 (S.D.N.Y. 2001)). Consequently, the fact that there has been disgorgement of the illegal profits from Jorge Ballesteros' activities does not prohibit the SEC from pursuing this action under the relevant statutes and rules for other relief provided for in the securities laws.
The Trust defendants also move to dismiss the plaintiff's claims pursuant to Rule 9(b) of the Federal Rules of Civil Procedure for failure to plead the alleged fraud with sufficient particularity. Claims under § 10(b) and Rule 10b-5 must satisfy Rule 9(b). Stevelman v. Alias Res. Inc., 174 F.3d 79, 84 (2d Cir. 1999); Alexander, 160 F. Supp.2d at 651. Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b); see also Four Finger Art Factory v. Dinicola, No. 99 Civ. 1259 (JGK), 2001 WL 21248, at *5 (S.D.N.Y. Jan. 9, 2001). To meet the requirements of Rule 9(b), a complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Mil1s v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). Although Rule 9(b) allows a plaintiff to allege fraudullenlt intent generally, a plaintiff must allege facts that give rise to a strong inference of fraudulent intent. Shields v. Citytrnst Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). This strong inference can be established either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id.; accord PI, Inc. v. Ogle, 932 F. Supp. 80, 84 (S.D.N.Y. 1996).
In the context of an insider trading claim, the specific facts with respect to the insider tips are often within the control and knowledge of the defendants, and therefore, Rule 9(b) is less stringent, so as "to allow circumstantial evidence to plead the specific content and circumstances of insider tips." Alexander, 160 F. Supp.2d at 649.
The Trust defendants argue that the Amended Complaint fails to satisfy Rule 9(b) because it fails to allege who at the Cardinal Trust, Gianni Trust, or the wholly owned investment companies engaged in fraudulent activity, and when, where and how they did so.*fn10 This argument simply misses the point. The SEC has alleged fraudulent activity, specifically insider trading, that was engaged in by Jorge Ballesteros, and it seeks to impute that knowledge and those actions to the Trust defendants. Consequently, so long as the allegations regarding Jorge Ballesteros' activities are sufficient to satisfy Rule 9(b), the Amended Complaint is sufficient to satisfy Rule 9(b) with respect to the Trust defendants. The Trust defendants have not argued that the allegations with respect to Jorge Ballesteros do not satisfy Rule 9(b). In any event, it is clear that the allegations of the Amended Complaint satisfy Rule 9(b). The Amended Complaint specifically alleges that Jose Ballesteros gained insider information with respect to an upcoming tender offer at a series of Nalco board meetings, Jose transferred that information to his brother Jorge in violation of Jose's fiduciary duty to Nalco, and Jorge directed that the Trust defendants execute the illegal trades. (See Compl. ¶¶ 33-38.). The Amended Complaint states sufficient particular facts to satisfy Rule 9(b) with respect to Jorge Ballesteros, and consequently for the Trust defendants, given the theory of liability in the Amended Complaint which imputes knowledge to the Trust defendants.
The Trust defendants also argue that the plaintiff is not entitled to civil penalties pursuant to the Insider Trading Sanctions Act (the "ITSA"), 15 U.S.C. § 78u-1. In this action, the SEC seeks not only civil penalties, but also a permanent injunction barring the Trust defendants from violating Rule 10b-5 and Rule 14e-3. Hence, irrespective of whether the SEC would be able to prove that the facts of this case support an award of civil penalties, the case will proceed. Because the SEC seeks an injunction, and because the Trust defendants do not argue that the SEC may not obtain an injunction as a form of relief, it is unnecessary, at this time, to reach the question of whether and under what circumstances the SEC may appropriately obtain civil penalties under the theory of liability alleged in the Amended Complaint.
The remaining arguments are either moot or without merit. The Trust defendants' motion to dismiss the claims of the SEC pursuant to Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 9(b) is denied.