Securities and Exchange Commission (Plaintiff-Appellee), Case Study Example

Facts In the Case

The foundation of this case dates back to 1980 when the defendant/appellant Anthony Materia managed to “divine the identities of at least four tender offer targets” (Securities and Exchange Commission), being offers to purchase stock market shares owned by a corporation or other business entity at a premium. Through these identities, Materia then purchased stock at a premium price and sold them for a substantial profit. But unfortunately, Materia’s employer (Bowne of New York City) discovered what he had done which resulted in the Securities and Exchange Commission (SEC) bringing an injunction against Materia for openly violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Section 10(b) refers to the “misappropriation of confidential information and trading. . . that lie within the proscriptive purview of the anti-fraud provisions of the securities laws” (Securities and Exchange Commission) of 1934, while Rule 10b-5 refers to utilizing a specific means to defraud in relation to the purchase and/or sale of securities. In basic terms, Materia stole the information gleaned from the tender offer targets and used this information for his own personal financial gain.

As a result of the injunction brought against him, Materia then proceeded to appeal the court’s judgment via the United States District Court for the Southern District of New York. In essence, the judgment enjoined him (i.e., the court order him to restrain from future fraudulent activities) of violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14e-3, and required or ordered Materia to disgorge (i.e., to give up) $99,862.50 in illegally obtained profits via the tender offer targets which were not revealed by the court.

Overriding issue

As noted by Circuit Judge Kaufman, Judge Brieant found after a 14-day non-jury trial that Materia had obtained personal financial gain “on the basis of confidential data stolen from Bowne and the offerors” via the tender offers which if made known to outside parties could have greatly inflated the price of specific stocks, thus making it mandatory for such offers to be “zealously guarded.” Lastly, and perhaps most importantly, Brieant “concluded that Materia had actual knowledge of this duty and thus had acted with scienter” (Securities and Exchange Commission), being that Materia had acted with prescience (i.e., knowing in advance) that his actions were wrong and illegal. This falls a bit short of the term Mens Rea or having criminal intent which overall is often difficult to prove in a court of law.

The Court’s Decision

The decision of the United States Court of Appeals for the Second Circuit was that Materia had misappropriated the confidential information of his employer via the tender offers and that he had used this information to make trades for personal financial gain. Legally, Materia had ignored the “fraud and deceit language of securities laws” which he certainly had prior knowledge of before deciding to use the confidential information for his own gain. Lastly, the court’s permanent injunction or order to cease and desist and its order to disgorge all of the profits were deemed to be “appropriate remedies” (Securities and Exchange Commission).

Reasoning

According to Circuit Judge Kaufman, Anthony Materia, due to being an employee of a firm that specializes in securities, knew full well that “knowledge is power” in relation to having access to the confidential information contained in the tender offers. In today’s highly-charged world of high finance, having the right information at the right time often proves to be extremely valuable, especially when special knowledge holds the potential to create great wealth. Thus, Materia absconded with his employer’s confidential information in order to make himself wealthy. Interestingly, Materia did not contest the judgment of the circuit court in relation to stealing his employer’s confidential information; in fact, his “sole argument (was) that such activity does not contravene Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934” (Securities and Exchange Commission) which was created in response to the debacle of the Stock Market collapse of 1919. However, there does exist a precedent, being the case of  United States v. Newman of 1983 in which the court decided that actions, such as those performed by Materia, “do indeed lie within the proscriptive purview of the anti-fraud provisions” of the 1934 act (Securities and Exchange Commission). Amazingly, Materia presented the argument in court that he was unaware of “the confidential nature of the information he handled in the course of his work.” If this is true, then Materia’s employers are more to blame than Materia himself, meaning that they failed to relate to him the sensitive nature of the information. But Judge Brieant “explicitly found that Bowne’s diligent efforts to communicate the need for secrecy vitiated” Materia’s claim (Securities and Exchange Commission).

Observation

Although Mr. Materia might disagree, his actions related to using confidential information for financial gain is, according to the SEC, insider trading which can be defined as “buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence while in the possession of material” (“Insider Trading”), such as the confidential information related to the tender offers. This definition also includes securities traded by individuals who misappropriate sensitive information. Thus, Mr. Materia was profoundly guilty of the charges brought against him. But unfortunately, the actions of Mr. Materia are nothing new and continue to be a major problem for financial institutions and the SEC.

Works Cited

“Insider Trading.” U.S. Securities and Exchange Commission. 2014. Web. Accessed 3 December 2014 <http://www.sec.gov/answers/insider.htm.>

Securities and Exchange Commission (Plaintiff-Appellee) v. Anthony Materia (Defendant-Appellant). No. 84-6043 United States Court of Appeals for the Second Circuit. 745 F.2d 197; 1984 U.S. App. LEXIS 18061.