Respond to the questions following “When Putin Affects the Value of Oil Stock” found on pp. 233-34 of your textbook.
1. Yukos is a Moscow-based joint-stock company whose shares trade on the Russian stock exchange.
Yukos shares also trade indirectly on multiple European exchanges and over-the-counter in the United States. Allegedly, Khodorkovsky was part of a select group of Russian business leaders known as “oligarchs” who supported former Russian President Boris N. Yeltsin but were politically opposed to current Russian Presi-dent Vladimir V. Putin.
The Tax Code of the Russian Federation prescribed a maximum income tax rate that incorporated two components: a tax payable to the federal budget and a tax payable to the budget of the taxpayer’s local region. For example, in 2004, the statutory maximum rate was 24%, of which up to 6.5% could be collected by the federal government and up to 17.5% by regional governments. The Tax Code also prescribed a mini-mum rate for taxes payable to regional governments. In 2004, that rate was 13.5%.
However, the regional governments could offer tax benefits to reduce or even eliminate the regional budget liability of certain categories of taxpayers. As a result of this regional variance in the effective income tax rate, taxpayers in the metropolitan regions of the Russian Federation, such as Moscow, paid higher taxes than taxpayers in remote regions, or “ZATOs.”From 2000 through 2003, Yukos allegedly grossly underpaid its taxes to the Russian Federation by ille-gally taking advantage of the ZATOs’ preferential tax treatment.
Yukos allegedly booked oil sales at “well below” market prices to 17 trading companies, all of which were registered within ZATOs. Without taking physical possession, the trading companies sold the oil to customers at market prices and claimed the tax ben-efits of their ZATOs.
However, the profits were “fun-neled . . . back to Yukos and Yukos paid taxes only on the initial below-market sales while reaping substantial profits from the [actual] market-price sales.” The regional trading companies may have received the benefits of ZATO registration illegitimately because “[n]o business was actually conducted by the sham companies in the ZATOs.” This Yukos tax strategy pre-sented enormous risk because it violated Russian law and because the Russian Federation had prosecuted other companies that had acted similarly.
Nonetheless, the tax risk was not disclosed in any of the Yuko’s fil-ings with the SEC. Also, what was filed with the SEC was not prepared in conformity with U.S. GAAP or other standards of financial reporting. At a secret meeting with Khodorkovsky and other oligarchs in 2000, Putin promised not to investigate potential wrongdoing at their companies if the oligarchs refrained from opposing Putin. Nearly three years later, at another such meeting, Khodorkovsky was said to have voiced his opinion that high-level officials in Putin’s government should be ousted.
According to the shareholders (plaintiffs), Putin reacted negatively and intimated to Khodorkovsky that the Russian Federa-tion might investigate Yukos’ methods of acquiring oil reserves. Despite Putin’s warnings, Khodorkovsky pub-licly criticized Putin and financed opposition parties.On October 25, 2003, Russian Federation author-ities arrested Khodorkovsky and charged him with fraud, embezzlement and evasion of personal income taxes. Days later, the Russian Government seized con-trol of Khodorkovsky’s 44% interest in Yukos as secu-rity against the approximately $1 billion he owed in taxes. The Tax Ministry then revealed that it had been investigating Yukos’ tax strategies.
The Department of Information and Public Relations of the General Prosecutors Office then announced
charges that it had accused Khodorkovsky and others of fraudulently operating an illegal scheme at Yukos to avoid tax lia-bility through shell company transactions.
On December 29, 2003, the Tax Ministry conclud-ed its audit of Yukos for tax year 2000 and issued a report that Yukos had illegally obtained the benefit of the ZATOs’ preferential tax treatment and owed $3.4 billion to the Russian Federation in back taxes, interest, and penalties for tax year 2000. As a result, Yukos defaulted on a $1 billion loan from private lenders, and the Russian government con-fiscated Yukos’ assets, including its main production facility and billions of dollars from its bank accounts. The price of Yukos securities “plummeted” in response to these events.
Yukos shareholders (plaintiffs) filed consolidated class actions against Khodorkovsky and others (defen-dants) on July 2, 2004. The U.S. plaintiffs had pur-chased Yukos securities between January 22, 2003, and October 25, 2003. They allege that Yukos, its outside auditor, and certain of its executives and controlling shareholders knowingly concealed the risk that the Russian Federation would take action against Yukos by failing to disclose (1) that Yukos had employed an illegal tax evasion scheme since 2000 and (2) that Khodorkovsky’s political activity exposed the compa-ny to retribution from the current Russian government. The plaintiffs based their claims on the fraud provision, Section 10(b), of the Securities Exchange Act.
PAULEY, District JudgeDefendants contend that that this Court must abstain under the act of state doctrine. Firmly entrenched as a principle of jurispru-dence, the act of state doctrine prevents the courts of the United States from “question[ing] the validity of public acts (acts jure imperii) performed by other sovereigns within their own borders.” The doctrine “has its roots, not in the Constitution, but in the notion of comity between independent sovereigns.” It also venerates the separation of powers within the federal Government by precluding the judiciary from deciding matters of foreign policy that are properly the province of the executive and legisla-tive branches.
Defendants urge this Court to abstain under the act of state doctrine because “[t]he adjudication of this dispute inevitably will require this Court to inquire into the actions and motives of the Russian Govern-ment in imposing confiscatory tax levies, penalties and interest on Yukos.” Implicit in their argument and resplendent in other portions of their motion papers is the notion that the Russian Federation targeted Yukos unforeseeably and that the Tax Ministry’s interpreta-tion of the Russian Federation Tax Code was without precedent.Defendants have not cited any precedent invoking the act of state doctrine to abstain from adjudicating a securities fraud action.
Under the arguments advanced by Defendants, the doctrine would mandate absten-tion from any action in which a foreign corporation is alleged to have concealed conduct deemed illegal by its home country upon a defendant’s mere assertion that the sovereign’s determination was in error. Such an application of the act of state doctrine would effec-tively insulate foreign corporations from a large swath of securities fraud claims by United States investors.The act of state doctrine does not preclude a court from deciding a case that implicates the motives or justifications of a foreign sovereign’s official act but does not seek to invalidate or circumvent that act. Rather, the doctrine applies only “when a court must decide—that is, when the outcome of the case turns upon—the effect of official action by a foreign sovereign.
” The act of state doctrine does not compel abstention from “cases and controversies that may embarrass foreign governments, but merely requires that, in the process of deciding, the acts of foreign sovereigns taken within their own jurisdiction shall be deemed valid.” The Yukos Defendants contend that “any defense by Yukos beyond the pleadings stage necessarily will involve its claims that it was denied due process, and that it never would have suffered the consequences of having its business confiscated, had the Russian government properly applied Russian law.” However, whether Yukos received due process in Russia is irrel-evant. Neither party in this action seeks to enforce or disturb the actions taken by the Russian
Federation. Moreover, in this action, the pertinent loss-causation inquiry concerns Defendants’ alleged misstatements or omissions and the losses suffered by Yukos investors— not the propriety of the Russian Federation’s taxenforcement and penal actions.
The central question is whether Defendants acted with fraudulent intent in withholding information from the investing public. Even if Defendants prevail with their arguments that the Russian Federation’s interpretation of Russian law was untenable, the validity of the Russian Federation’s acts would be unaffected. Under the act-of-state doctrine, the assessment of the validity of a foreign law is limited to its application within the sovereign’s territory; under the revenue rule, United States courts avoid the application of a foreign sovereign’s tax laws in the United States. Both approaches enable courts to avoid entanglement with questions about the underlying validity of a foreign sovereign’s laws.
Because Plaintiffs here are not asking this Court to enforce the Russian tax judgments, this Court need not evaluate the policies behind the Russian Federation’s tax legislation or the regional variance among effective federal income tax rates which Yukos is alleged to have exploited. In sum, this Court is not being called on to either invalidate or enforce the Russian Federation’s mea-sures, nor will the validity of those sovereign acts have any bearing on Defendants’ motions to dismiss or on questions likely to affect the merits of this litigation. As such, the act of state doctrine does not warrant abstention.The case was dismissed on grounds other than the act of state doctrine.
CASE QUESTIONS
• Describe how Yukos is alleged to have saved sig-nificant amounts in taxes.
•Explain what act of the Russian Federation is in question.
• What are the plaintiffs asking the court to decide? Does that decision require revisiting what the Russian Federation did, and why or why not? Please respond to questions 1-4 at the end of Chapter 9 found on pp.324-25 of your textbook
2. In the May 31, 2004, issue of The Weekly Standard, edi-tor Fred Barnes wrote the following commentary:A FEW YEARS AGO Michael Moore, who’s now promoting an anti-President Bush movie entitled Fahrenheit 9/11, announced he’d gotten the goods on me, indeed hung me out to dry on my own words.
It was in his first bestselling book, Stupid White Men. Moore wrote he’d once been “forced” to listen to my comments on a TV chat show, The McLaughlin Group. I had whined “on and on about the sorry state of American education,” Moore said, and wound up by bellowing: “These kids don’t even know what The Iliad and The Odyssey are!”Moore’s interest was piqued, so the next day he said he called me. “Fred,” he quoted himself as saying, “tell me what The Iliad and The Odyssey are.” I started “hemming and hawing,” Moore wrote. And then I said, according to Moore: “Well, they’re . . . uh . . . you know . . . uh . . . okay, fine, you got me—I don’t know what they’re about.
Happy now?” He’d smoked me out as a fraud, or maybe worse.The only problem is none of this is true. It never happened. Moore is a liar. He made it up. It’s a fabrication on two levels. One, I’ve never met Moore or even talked to him on the phone. And, two, I read both The Iliad and The Odyssey in my first year at the University of Virginia. Just for the record, I learned what they were about even before college. Like everyone else my age, I got my classical education from the big screen.
I saw the Iliad movie called Helen of Troy and while I forget the name of the Odyssey film, I think it starred Kirk Douglas as Odysseus.So why didn’t I scream bloody murder when the book came out in 2001? I didn’t learn about the phony anecdote until it was brought to my attention by Alan Wolfe, who was reviewing Moore’s book for the New Republic. He asked, by email, if the story were true. I said no, not a word of it, and Wolfe quoted me as saying that. That was enough, I thought. After all, who would take a shrill, lying lefty like Moore seriously?Was Mr. Barnes defamed? Could he bring suit now?
3. Douglas Margreiter was severely injured in New Orleans on the night of April 6, 1976. He was the chief of the pharmacy section of the Colorado Department of Social Services and was in New Orleans to attend the annual meeting of the American Pharmaceutical Association.
On Tuesday evening, April 6, Mr. Margreiter had dinner at the Royal Sonesta Hotel with two associates from Colorado who were attending the meeting and were staying in rooms adjacent to Mr. Margreiter’s in the New Hotel Monteleone. Mr. Margreiter returned to his room between 10:30 p.m. and 11:00 p.m.; one of his friends returned to his adjoining room at the same time. Another friend was to come by Mr. Margreiter’s room later to discuss what sessions of the meetings each would attend the next day.
About three hours later, Mr. Margreiter was found severely beaten and unconscious in a parking lot three blocks from the Monteleone. The police who found him said they thought he was highly intoxicated, and they took him to Charity Hospital. His friends later had him moved to the Hotel Dieu.Mr. Margreiter said two men had unlocked his hotel room door and entered his room. He was beaten about the head and shoulders and had only the
recollection of being carried to a dark alley. He required a craniotomy and other medical treatment and suffered permanent effects from the incident. Mr. Margreiter sued the hotel on grounds that the hotel was negligent in not controlling access to elevators and hence to the guests’ rooms. The hotel says Mr. Marg-reiter was intoxicated and met his fate outside the hotel. Is the hotel liable? [Margreiter v New Hotel Monteleone, 640 F.2d 508 (5th Cir. 1981)]
4. Rhodes tripped over a hospital cord while visiting a patient in the Detroit Medical Center. She fell and was injured. She filed suit against the hospital for negligence in the condition of its premises. The cord was black and the floor was gray. Should she be able to recover from the hospital? [Rhodes v Detroit Medical Center, 2006 WL 355249 (C.A. Mich. 2006)]
5. The CBS news show 60 Minutes pulled from pro-gramming a scheduled airing of an interview with a Jef-frey S. Wigand, a former tobacco executive, when threats of both libel and tortious interference with contract suits arose. Brown & Williamson lawyers notified CBS News that Wigand had signed a confidentiality agreement and that the company would sue CBS News for interference with that contract if the interview were run.
60 Minutes ran a story on tobacco companies without the interview. CBS correspondents Mike Wallace and Morley Safer protested the decision of CBS News executives. However, the Wall Street Journal ran a story describing CBS News’s unusual arrangements with Wigand, including the payment of a consulting fee of $12,000 and the promise of full indemnifi- cation. Did CBS commit tortious interference of contract?
Respond to questions 1-3 following Smith v. Coleman found on pp. 469-471 in your textbook
6. Ginger Smith (plaintiff) was a passenger on Ronald Smith’s boat on West Point Lake, Alabama. Ronald Smith (no relation to Ginger) was operating the boat, which was towing Ms. Smith’s son, Shane McClellan, on an inflatable inner tube behind the boat. Shane McClellan weighed 150 pounds at the time and the tube itself weighed 10 pounds.
The inner tube was tied to the boat by a 50-foot Model 51650 polypropylene line that was manufactured by Lehigh Consumer Products, LLC, but carried the label of The Coleman Company (defendants) pursuant to a licensing arrangement, and was purchased at a nearby Walmart store.
While Shane McClellan was being towed on the inner tube, the line snapped, and the end connected to the boat flew back toward the boat and hit Ms. Smith in the eye, causing the loss of that eye.The packaging of the line contained several state-ments. A paper insert identifies it as a “50 ft × 5/16 in UTILITY LINE.” Just below that appears the phrase “Ideal for use on boat or dock.” Still farther down the insert and in an all-caps font smaller than that used in the first statement appears, divided over two lines, “175 LBS WORKING LOAD LIMIT/STAYS AFLOAT.”
A longer cautionary message appears at the bottom of the insert. It states:Avoid using a knot, splicing is preferable. Knots reduce the strength of the rope up to 40%. Do not use this product where personal safety could be endangered. Never stand in line with a rope under tension.
Such a rope, particularly nylon rope, may recoil (snap back). Misuse can result in serious injury or death.There was a warning label printed on the inner tube itself, a portion of which advised boaters to “[u]se a tow rope of at least 1500 lbs average tensile strength for pulling a single person. . . .” The overall size of this warning label is 8 × 9 inches, and its text complies with the warning label recommended by the Water Sports Industry Association for use on inflatable tubes.Ms. Smith filed suit against Coleman, Walmart, and Ronald Smith. (Walmart and Smith were dismissed from the case). Coleman argued that its package warned against using the line for towing and moved for summary judgment.
JUDICIAL OPINIONWATKINS,
District JudgeA manufacturer has a duty “to warn users of the dangerous propensities of a product only when such products are dangerous when put to their intended use.” “[A] manufacturer is under no duty to warn a user of every danger which may exist during the use of the product, especially when such danger is open and obvious.” “. . . the warning need only be one that is reasonable under the circumstances and it need not be the best possible warning.
”It is a defense to a negligent failure to warn claim that there is no evidence “that the allegedly inadequate warning would have been read and heeded and would have kept the accident from occurring.” In this case, Defendants point to the deposition testimony of Ron-ald Smith, who purchased the line and attached it to the boat and inner tube. Mr. Smith’s testimony was that he did not recall reading “any other part of the warn-ings on the package other than the poundage.” He specifically answered a question in the negative about whether he had read the warning against tying knots in the line. According to Defendants, Mr. Smith’s use of the line violated three parts of the warnings given on the package insert, which he confessed having not read:
(1) the warning against tying knots in the line;
(2) the warning against using the line where personal safe-ty could be endangered; and
(3) the warning against standing in line “with a rope under tension.
”The court pauses to contemplate an issue not dis-cussed by either party, but which seems so fundamen-tal to the cause of action asserted by Ms. Smith that it is difficult to adequately address the failure-to-warn claim without touching on it.
That issue is how a neg-ligent failure-to-warn claim is affected by the plaintiff not having been the purchaser, or even the “user,” of the item at issue. Both parties proceed as if the relevant inquiry is whether Mr. Smith, or perhaps either Mr. or Ms. Smith, read and followed the warnings on the package. It is undisputed that Mr. Smith purchased the rope and is the person who tied it to the boat and inner tube.
Given the disposable nature of the package on which the warnings appeared, it is unclear wheth-er Ms. Smith even had the opportunity to read the warnings— and so, in the summary judgment posture, this court must assume that she did not, if that factual question is relevant to the outcome.Conceding that Mr. Smith did not recall reading the relevant warnings, Plaintiff’s argument seems to be that the phrase “warning” has a particular, technical meaning, such that the statements on the package here were not “warnings” for the purposes of the Alabama case law. The contours of this view are not very well fleshed out, but the argument is perhaps that because the statements on the packaging did not actually contain the word “WARNING,” with accompanying symbols such as an exclamation mark
within a trian-gle, they were not actually warnings at all, but merely “safety information.
”The only basis for this distinction is a statement made by one of Defendants’ experts that “warnings can change behavior, but it is difficult to change behavior with safety information.” Perhaps there is a technical distinction, recognized by experts in product labeling or in regulations, between the two concepts, and per-haps, under that distinction, the package insert here is “safety information” rather than a “warning,” although it is far from clear from the deposition excerpts before the court that this is what the expert meant. Regard-less, the argument misses the point that the court must apply the word “warning” as it has been used in the Alabama case law, which governs this diversity case.
The cases cited give no indication of limiting the word “warning” to a narrow, technical meaning. Certainly, the common use of the word “warning” does not limit the concept to statements appearing under the word “WARNING,” accompanied by particular symbols, or colored in bright orange. The statements appearing on the utility line’s package are cautionary in nature, designed to warn, in the ordinary sense of the term, users of the product about potential dangers of usage.Thus, the court concludes that the statements on the package were warnings for purposes of Alabama law.
As stated above, it is conceded that Mr. Smith did not read the warnings, except for the weight limitation. The only remaining question is whether failure to heed the warnings caused the accident. The court is reluctant to conclude that the warning against uses “where per- sonal safety could be endangered” can suffice for this purpose; it is so vague as to be essentially meaningless. Any use, no matter how seemingly safe or appropriate, that actually resulted in injury could be said after the fact to have endangered personal safety. The other two warnings, however, are quite specific, and both were violated by Mr. Smith.
Mr. Smith tied knots in the rope in order to attach it to the boat and the inner tube. Both Mr. Smith and Plaintiff were on board the open boat towing the inner tube behind it; in the ordinary use of language, they were both standing “in line with a rope under tension.”Indeed, it is difficult to conceive how the rope could ever be used for towing someone behind an open boat without both the person being towed and persons on board the boat violating the warning against stand-ing in line with a rope under tension.
While Plaintiff’s expert prevaricates somewhat over whether Plaintiff was herself “in line” with the rope at the time it broke, heeding this warning still would have prevented the accident altogether, as there would have been no way to tow Plaintiff’s son on the inner tube without putting him in line with the rope under tension.Finally, the court does not base its ruling on Defen-dants’ argument that towing a 150-pound child (plus a five to ten pound inner tube) would have produced a dynamic load far in excess of the 175-pound limitation on the rope, so Plaintiff’s argument that there was no way for Mr. Smith or Plaintiff to be aware of the differ-ence between static and dynamic loads is irrelevant. The court also does not base its decision on arguments concerning the warning label on the inner tube itself.
Because there is no evidence that the allegedly inad-equate warning was read and heeded, or that, if it had been read and heeded, the accident would have occurred anyway, the motion for summary judgment on the negligent- failure-to-warn claim is due to be granted.With respect to the express warranty claim, Plain-tiff’s claim is that the statement that the line was “ideal for use on boat or dock” constitutes an express war-ranty. Statements “that are mere sales talk or ‘puffery’ do not give rise to express warranties,” while “repre- sentations of fact” may give rise to such warranties.
While the word “ideal” seems closer to the description of an item as “in good shape” that Alabama courts have found to constitute “puffery,” Scoggin v Listerhill Employees Credit Union, 658 So.2d 376, 377 (Ala.1995), arguably the reference to use on a boat or dock could constitute a more specific assurance in some circum-stances. Regardless, the phrase “ideal for use on boat or dock” is not the equivalent of “ideal for towing behind a boat,” especially when, as explained in the previous section, the specific warnings on the package make it essentially impossible to use the utility line for towing in compliance with the packaging.
There is no evidence that any express warranty was breached, and summary judgment is due to be granted on this claim.To the extent that Plaintiff makes a claim for breach of an implied warranty of merchantability, she does continued not explain how that claim fits the requirements of the statute, and the claim fails for essentially the same rea-son as the express warranty claim. A use excluded by warning labels cannot be an “ordinary purpose [ ] for which such goods are used
.”The final warranty claim is for breach of an implied warranty of fitness for a particular purpose. Plaintiff has done no more than assert that Defendants had “reason to know” that the line would be used to tow persons behind a boat; regardless, Plaintiff clearly did not “rely on the seller’s skill or judgment to select or furnish suitable goods.” Rather, Mr. Smith selected and purchased the utility line for himself at a Wal-Mart store. Summary judgment is due to be granted on the warranty claims.The court need not reach Defendants’ argument that Coleman is entitled to summary judgment because its only role in producing the utility line was to license its name to Lehigh.Summary judgment for Defendants.
CASE QUESTIONS
• What is the law with regard to product users who do not read package warnings?
• What point does the court make about Ms. Smith not actually being the purchaser of the line?
• What lessons should Coleman take from its expe-rience of being a defendant along with its licensee for the line?
Submit responses to questions 9 (a-d) and 10 (5 parts) found on page 550 of your textbook.
7. Do the following slogans constitute protectable busi-ness properties? a.
MetLife: “Get Met, It Pays” b. General Electric: “GE Brings Good Things to Life” c. Nike: “Just Do It”d. Toys “R” Us: “R Us”
8. Coffee Bean & Tea Leaf Co. of Los Angeles has sued Starbucks for trademark infringement for the company’s use of the term “ice blended,” a term that the LA company claims it coined. What protections exist for trade names? For trade-marks? Do you think there is infringement in these cases? Please respond to questions 1-3 following Case 18.3 found on pp.659-61; “My Brother–The Keeper of Inside Information”
9. In 2002, Maher Kara joined Citigroup’s health care investment banking group. Over the next few years, Maher began to discuss aspects of his job with his older brother, Mounir (“Michael”) Kara. Maher began to suspect that Michael was trading on the information they discussed, although Michael initially denied it.
As time wore on, Michael became more brazen and more persistent in his requests for inside information, and Maher knowingly obliged. From late 2004 through early 2007, Maher regularly disclosed to Michael infor-mation about upcoming mergers and acquisitions of and by Citigroup clients.In 2003, Maher Kara became engaged to Salman’s sister, Saswan (“Suzie”) Salman. Salman and Michael Kara became fast friends. In the fall of 2004, Michael began to share with Salman the inside information that he had learned from Maher, encouraging Salman to “mirror-imag[e]” his trading activity.
Rather than trade through his own brokerage account, however, Salman arranged to deposit money, via a series of transfers through other accounts, into a brokerage account held jointly in the name of his wife’s sister and her hus-band, Karim Bayyouk. Salman then shared the inside information with Bayyouk, and the two split the profits from Bayyouk’s trading. From 2004 to 2007, Bayyouk and Michael Kara executed nearly identical trades in securities issued by Citigroup clients shortly before the announcement of major transactions. As a result of these trades, Salman and Bayyouk’s account grew from $396,000 to approximately $2.1 million.The government presented evidence that Salman knew full well that Maher Kara was the source of the information.
Michael Kara (who pled guilty and testified for the government) testified that, early in the scheme, Salman asked where the information was coming from, and Michael told him, directly, that it came from Maher. Michael further testified about an incident that occurred around the time of Maher and Suzie’s wedding in 2005. According to Michael Kara, on that visit, Michael noticed that there were many papers relating to their stock trading strewn about Sal-man’s office. Michael became angry and admonished Salman that he had to be careful with the information because it was coming from Maher.
Michael testified that Salman agreed that they had to “protect” Maher and promised to shred all of the papers.Maher and Michael Kara enjoyed a close and mutually beneficial relationship. Michael helped pay for Maher’s college. Maher, for his part, testified that he “love[d] [his] brother very much” and that he gave Michael the inside information in order to “benefit him” and to “fulfill [ ] whatever needs he had.” For example, Maher testified that on one occa-sion, he received a call from Michael asking for a “favor,” requesting “information,” and explaining that he “owe[d] somebody.”
After Michael turned down Maher’s offer of money, Maher gave him a tip about an upcoming acquisition instead.Michael gave a toast at Maher’s wedding, which Salman attended, in which Michael described how he spoke to his younger brother nearly every day and described Maher as his “mentor,” his “private coun-sel,” and “one of the most generous human beings he knows.” Maher, overcome with emotion, began to weep.The jury found Salman guilty on all five counts of insider trading. Salman appealed.
JUDICIAL OPINIONRAKOFF,
Senior District JudgeSalman urges us to adopt U.S. v. Newman, 773 F.3d438 (2nd Cir. 2014), cert. denied, 136 S.Ct. 242 (2015) as the law of this Circuit, and contends that, under Newman, the evidence was insufficient to find either that Maher Kara disclosed the information to Michael Kara in exchange for a personal benefit, or, if he did, that Sal-man knew of such benefit. The “personal benefit” requirement for tippee liability derives from the Supreme Court’s opinion in Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). Dirks presented an unusual fact pattern. Ronald Secrist, a whistleblower at a company called Equity Funding, had contacted Raymond Dirks, a well-known securities analyst, after Secrist’s prior dis- closures to the Securities and Exchange Commission (“SEC”) had gone for naught. Secrist, for no other purpose than exposing the Equity Funding fraud, disclosed inside information about the company to Dirks, who in turn launched his own investigation that eventually led to public exposure of a massive fraud.
However, in the process of his investigation, Dirks openly discussed the information provided by Secrist with various clients and investors, some of whom then sold their Equity Funding stock on the basis of that information. Upon learning this, the SEC charged Dirks with securities fraud, and this position was upheld by an SEC Administrative Law Judge and affirmed by the District of Columbia Circuit, after which certiorari was granted.
When the case came to the Supreme Court, the Court, began by noting that, whistleblowing quite aside, corporate insiders, in the many conversations they typically have with stock analysts, often acciden- tally or mistakenly disclose material information that is not immediately available to the public.
Thus, “[i]mposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic infor-mation from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.” At the same time, the Court continued, “[t]he need for a ban on some tippee trading is clear. Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they may not give such information to an outsider for the same improper purpose of exploiting the infor-mation for their personal gain.”
“Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure,” for in that case the insider is breaching his fiduciary duty to the company’s shareholders not to exploit com-pany information for his personal benefit. And a tippee is equally liable if “the tippee knows or should know that there has been [such] a breach,” i.e., knows of the personal benefit.The last-quoted holding of Dirks governs this case.
Maher’s disclosure of confidential information to Michael, knowing that he intended to trade on it, was precisely the “gift of confidential information to a trading relative” that Dirks envisioned. Indeed, Maher himself testified that, by providing Michael with inside information, he intended to “benefit” his brother and to “fulfill[ ] whatever needs he had.” As to Salman’s knowledge, Michael Kara . . . testified that he directly told Salman that it was Michael’s brother Maher who was, repeatedly, leaking the inside information that Michael then conveyed to Salman. Given the Kara brothers’ close relationship, Salman could readily have inferred Maher’s intent to benefit Michael. Thus, there can be no question that, under Dirks, the evidence was sufficient for the jury to find that Maher disclosed the information in breach of his fiduciary duties and that Salman knew as much.Salman argues that the Second Circuit in Newmaninterpreted Dirks to require more than this.
Of course, Newman is not binding on us. . . . But we would not lightly ignore the most recent ruling of our sister circuit in an area of law that it has frequently encountered.The defendants in Newman, Todd Newman and Anthony Chiasson, both portfolio managers, were charged with trading on material non-public infor-mation regarding two companies, Dell and NVIDIA, obtained by a group of analysts at various hedge funds and investment firms. The information came to them via two distinct tipping chains.
The Dell tipping chain originated with Rob Ray, a member of Dell’s investor relations department. Ray tipped information regarding Dell’s earnings numbers to Sandy Goyal, an analyst. Goyal, in turn, relayed the information to Jesse Tortora, another analyst, who relayed it to his manager, Newman, as well as to other analysts includ-ing Spyridon Adondakis, who passed it to Chiasson. Id. The NVIDIA tipping chain began with Chris Choi, of NVIDIA’s finance unit, who tipped inside informa-tion to his acquaintance Hyung Lim, who passed it to Danny Kuo, an analyst, who circulated it to his analyst friends, including Tortora and Adondakis, who in turn gave it to Newman and Chiasson. Having received this information, Newman and Chiasson executed trades in both Dell and NVIDIA stock, generating lavish profits for their respective funds.
The Second Circuit held that this evidence was insufficient to establish that either Ray or Choi received a personal benefit in exchange for the tip. It noted that, although the “personal benefit” standard is “permis-sive,” it “does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.” Instead, to the extent that “a personal benefit may be inferred from a personal relationship between the tipper and tippee, . . . such an inference is imper-missible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”
Salman reads Newman to hold that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit. In particular, he
focuses on the language indicating that the exchange of information must include “at least a potential gain of a pecuniary or similarly valuable nature,” which he reads as referring to the benefit received by the tipper. Salman argues that because there is no evidence that Maher received any such tangible benefit in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden.To the extent Newman can be read to go so far, we decline to follow it.
Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an “insider makes a gift of confidential information to a trading relative or friend.” In our case, the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information.
Specifically, Maher Kara testified that he disclosed the material nonpublic infor-mation for the purpose of benefitting and providing for his brother Michael. Thus, the evidence that Maher Kara breached his fiduciary duties could not have been more clear, and the fact that the disclosed informa- tion was market-sensitive—and therefore within the reach of the securities laws.
If Salman’s theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.
Proof that the insider disclosed material nonpublic infor-mation with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.[W]e find that the evidence was more than suf-ficient for a rational jury to find both that the inside information was disclosed in breach of a fiduciary duty, and that Salman knew of that breach at the time he traded on it.Affirmed.
CASE QUESTIONS
• Explain the differences between and among the Dirks, Newman, and Salman cases.
• List the elements the court requires for proof of insider trading. • What should those who have inside information learn from this decision?
Respond to questions 1-3 found on p. 754 following Case 20.6 on pp. 753-54; “Lying Is Not a Defense for Discrimination”
10.
For 30 years, Christine McKennon (petitioner) worked for Nashville Banner Publishing Company (respon-dent) (Banner), but she was terminated as part of a work reduction plan.
She was 62 years old at the time of her termination. Ms. McKennon filed suit, alleging her termination was a violation of the Age Discrimina-tion in Employment Act (ADEA).During Ms. McKennon’s deposition, she testified that during her final year of employment, she had copied several confidential documents bearing upon the company’s financial condition. She had access to these records as secretary to Banner’s comptroller. Ms. McKennon took the copies home and showed them to her husband. Her motivation, she averred, was apprehension that she was about to be fired because of her age.
When she became concerned about her job, she removed and copied the documents for “insurance” and “protection.” A few days after these deposition disclosures, Banner sent Ms. McKennon a letter declaring that removal and copying of the records was in violation of her job responsibilities and advised her (again) that she was terminated. Banner’s letter also recited that had it known of Ms. McKennon’s misconduct, it would have discharged her at once for that reason.Banner conceded its discrimination in district court, which granted summary judgment for Banner on grounds that Ms. McKennon’s misconduct was a defense. The court of appeals affirmed, and Ms.McK-ennon appealed.
JUDICIAL OPINIONKENNEDY, JusticeWe shall assume that the sole reason for McKennon’s initial discharge was her age, a discharge violative of the ADEA. Our further premise is that the misconduct revealed by the deposition was so grave that McK-ennon’s immediate discharge would have followed its disclosure in any event.
We do question the legal conclusion reached by those courts that after-acquired evidence of wrongdoing which would have resulted in discharge bars employees from any relief under the ADEA. That ruling is incorrect.The ADEA and Title VII share common substantive features and also a common purpose: “the elimina-tion of discrimination in the workplace.” Congress designed the remedial measures in these statutes to serve as a “spur or catalyst” to cause employers “to self-examine and to self-evaluate their employment practices and to endeavor to eliminate, so far as possi-ble, the last vestiges” of discrimination. The ADEA, in keeping with these purposes, contains a vital element found in both Title VII and the Fair Labor Standards Act: it grants an injured employee a right of action to obtain the authorized relief.The objectives of the ADEA are furthered when even a single employee establishes that an employer has discriminated against him or her.
The disclosure through litigation of incidents or practices which vio-late national policies respecting nondiscrimination in the work force is itself important, for the occurrence of violations may disclose patterns of noncompliance resulting from a misappreciation of the Act’s opera-tion or entrenched resistance to its commands, either of which can be of industry-wide significance. The efficacy of its enforcement mechanisms becomes one measure of the success of the Act.
As we have said, the case comes to us on the express assumption that an unlawful motive was the sole basis for the firing. McKennon’s misconduct was not dis-covered until after she had been fired. The employer could not have been motivated by knowledge it did not have and it cannot now claim that the employee was fired for the nondiscriminatory reason. Mixed motive cases are inapposite here, except to the important extent they underscore the necessity of determining the employer’s motives in ordering the discharge, an essential element in determining whether the employer violated the federal antidiscrimination law.
As we have observed, “proving that the same decision would have been justified . . . is not the same as proving that the same decision would have been made.”The ADEA, like Title VII, is not a general regula-tion of the workplace but a law which prohibits dis-crimination. The statute does not constrain employers from exercising significant other prerogatives and discretions in the course of the hiring, promoting, and discharging of their employees. In determining appropriate remedial action, the employee’s wrongdo-ing becomes relevant not to punish the employee, or out of concern “for the relative moral worth of the par- ties,” but to take due account of the lawful prerogatives of the employer in the usual course of its business and the corresponding equities that it has arising from the employee’s wrongdoing.
The proper boundaries of remedial relief in the general class of cases where, after termination, it is dis-covered that the employee has engaged in wrongdoing must be addressed by the judicial system in the ordinary course of further decisions, for the factual permutations and the equitable considerations they raise will vary from case to case.
We do conclude that here, and as a general rule in cases of this type, neither reinstatement nor front pay is an appropriate remedy. It would be both inequitable and pointless to order the reinstatement of someone the employer would have terminated, and will terminate, in any event and upon lawful grounds.Where an employer seeks to rely upon after-ac-quired evidence of wrongdoing, it must first establish that the wrongdoing was of such severity that the employee in fact would have been terminated on those grounds alone if the employer had known of it at the time of the discharge.
The concern that employers might as a routine matter undertake extensive discov-ery into an employee’s background or performance on the job to resist claims under the Act is not an insub-stantial one, but we think the authority of the courts to award attorney’s fees, mandated under the statute, 29 U.S.C. §§ 216(b), 626(b), and in appropriate cases to invoke the provisions of Rule11 of the Federal Rules of Civil Procedure will deter most abuses.The judgment is reversed.
CASE QUESTIONS
1. • Why is the timing of the misconduct disclosure important? • Does Banner deny discriminatory intent? • Why are “mixed motive” cases not relevant in this analysis?
