United States District Court, S.D. New York
For Securities and Exchange Commission, Plaintiff: George S. Canellos, LEAD ATTORNEY, Securities & Exchange Commission (3 WFC), New York, NY; Daniel Robbins Marcus, U.S. Securities and Exchange Commission(3 World Financial), Three World Financial Center, New York, NY; Matthew James Watkins, Securities & Exchange Commission (3 WFC), Brookfield Place, New York, NY.
MEMORANDUM & ORDER
ALISON J. NATHAN, United States District Judge.
Before the Court is the Security and Exchange Commission's (" Plaintiff" or " SEC" ) motion for summary judgment against Defendants John Kinnucan, who proceeds pro se, and Broadband Research Corporation (" Broadband" ). Dkt. No. 21. In particular, the SEC requests that the Court find that Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5. The SEC further requests that Defendants be permanently enjoined from future violations of Section 10(b), ordered to disgorge profits with prejudgment interest, and subjected to the maximum civil penalty. For the reasons that follow the SEC motion is GRANTED in its entirety.
Broadband is a corporation based in Portland, Oregon, purportedly engaged " in the business of providing to its clients legitimate research about publicly traded technology companies." Pl. 56.1 Statement ¶ 6. From 2008 until November 2010, Kinnucan was the President of Broadband. Id. ¶ 7.
Beginning in or around 2008, Kinnucan developed a relationship with an employee at the publicly traded company F5 Networks, Inc. (" F5" ), who began to provide him with F5's gross sales numbers in late 2009. Pl. 56.1 Statement ¶ ¶ 11-12; see also Watkins Decl. Ex. 3. On or about July 2, 2010, Kinnucan was informed " that F5 had generated better-than-expected financial results in its third quarter of fiscal year 2010." Id. ¶ 15. These results were not scheduled to be announced until July 21, 2010. Id.
Later that day, Kinnucan shared this information about F5's third quarter results with an analyst at Columbia Management Investment Advisors, LLC (" Columbia" ), which covered 43,100 shares of a previously established short position in F5 stock that afternoon. Pl. 56.1 Statement ¶ 16; Watkins Decl. Ex. 8. On July 6, 2010, and July 15, 2010, Kinnucan spoke with a portfolio manager Carlson Capital, L.P. (" Carlson" ), who purchased 99,000 shares of F5 stock prior to the announcement of the results on July 21, 2010. Pl. 56.1 Statement ¶ ¶ 15, 17; Watkins Decl. Ex. 7.
Following the close of trading on July 21, 2010, F5 announced third quarter revenues of $230.5 million, exceeding Wall Street analysts' consensus estimate by approximately $11 million. Pl. 56.1 Statement ¶ 18. The following day, F5's share price increased from $73.11 to $83.40, a gain of 14%. Id. As a result of having previously covered 43,100 shares, Columbia avoided $631,656.36 in losses. Id. ¶ 19; Watkins Decl. Exs. 8, 9. As a result of having previously purchased 99,000 shares, which were sold on July 22 and July 23, Carlson earned $951,789.60 in profits. Pl. 56.1 Statement ¶ 20; Watkins Decl. Exs. 6, 7. In total, Kinnucan's tippees' profits and avoided losses amounted to $1,583,445.96. Pl. 56.1 Statement ¶ 21.
On February 12, 2012, the United States filed an indictment against Kinnucan, charging him with one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371, and two counts of securities fraud in violation of 15 U.S.C. § § 78j(b) and 78ff, based on the F5 trades described above. Pl. 56.1 Statement ¶ 23; Watkins Decl. Ex. 3. Kinnucan pleaded guilty to these counts on July 25, 2012. Pl. 56. 1 Statement ¶ 25. At the time of his plea, Kinnucan made the following allocution:
From approximately 2008 to 2010 I worked with others to obtain material nonpublic information from employees of public companies. I knew that the sources of this information had an obligation to keep the information confidential, but the sources gave me the information in exchange for personal benefits. I then passed along this information to clients in my own company, knowing they would use the information to make trading decisions. In particular, in July of 2010 I passed material nonpublic information to hedge fund clients in my company, including individuals located in New York City. We communicated by telephone and email. Based on the information I provided, two clients made purchases of [F5 stock] on July 2 and July 21, 2010. I knew at the time that what I was doing was wrong and illegal.
Pl. 56.1 Statement ¶ 27; Watkins Decl. Ex. 4, at 16.
Meanwhile, the SEC filed this parallel civil enforcement action on February 17, 2012. Dkt. No. 17. Neither Kinnucan nor Broadband ever responded to the SEC Complaint. See Watkins Decl. Ex. 2. The SEC subsequently filed ...