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Ninth Circuit Finds Director of Fidelity National Traded on Confidential Information about Planned Buy-out
Securities and Exchange Commission v. J. Thomas Talbot
No. 06-55561, U.S. Court of Appeals for the Ninth Circuit, 06/30/2008
Holding
The Ninth Circuit ruled that defendant-appellee J. Thomas Talbot, a member of the Board of Directors ("Board") of Fidelity National Financial, Inc. ("Fidelity"), traded on confidential information about the impending acquisition of LendingTree, Inc. ("LendingTree"), a company where Fidelity holds a 10 percent interest. Talbot bought and sold LendingTree stocks after being informed during a Board meeting about such acquisition. In this regard, he misappropriated information from Fidelity, a source to which he owed a fiduciary duty arising from a relationship of trust and confidence by virtue of his position on its Board. Fidelity was the rightful owner of the information that was both nonpublic and confidential. This conduct, assuming the information on which Talbot traded was material, fell squarely within the range of conduct the Supreme Court contemplated in a previous case. But the Ninth Circuit could not say that the district court clearly erred in determining that the information on which Talbot traded was not material as a matter of law, given the genuine issues of material fact, particularly as to what information was actually conveyed to the Board. On this basis, the Ninth Circuit remanded the case for further proceedings.
Detailed Summary
Plaintiff-appellee Talbot, a member of the Board of Fidelity, a Delaware corporation, traded on confidential information about the impending acquisition of LendingTree, Inc., which he received in his capacity as a Fidelity director. In this appeal, the Ninth Circuit resolved the issue whether Talbot can be held liable under § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, for misappropriating information from Fidelity, in the absence of a fiduciary duty of confidentiality owed to LendingTree by Fidelity or Talbot when he executed the trades.
Talbot is a businessman and attorney who, for the past thirty years, had served as a director on the boards of several companies. In April 2003, Talbot sat on the Board of Fidelity, a publicly traded Delaware corporation and national title insurance company. Fidelity owned approximately a 10 percent interest in LendingTree, an online lending and realty services exchange, which is publicly traded on the NASDAQ National Market System.
On April 22, 2003, during a quarterly Board meeting, William Foley, CEO of Fidelity, informed the Board of the impending acquisition of LendingTree by a third party. On April 24, 2003, Talbot purchased 5000 shares of LendingTree. On April 30, 2003, he purchased an additional 5000 shares. On May 5, 2003, LendingTree’s stock rose by about 41 percent on news, immediately after which Talbot sold all of his LendingTree shares for a profit.
On June 23, 2004, the SEC brought a civil action against Talbot in the U.S. District Court for the Central District of California. The complaint alleged that Talbot had traded on material, nonpublic information in violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
Both parties moved for summary judgment. The district court granted Talbot’s motion and denied the SEC’s on February 14, 2006. Ruling on the SEC’s “misappropriation theory” of liability (a theory cited for example in United States v. O’Hagan, 521 U.S. 642 (1997), the district court held that Talbot could be liable under such a theory only if Talbot or Fidelity owed a fiduciary duty of confidentiality to LendingTree, the “originating source” of the information on which Talbot traded. Opinion, p. 7789, citing SEC v. Talbot, 430 F. Supp. 2d 1029, 1049, 1064 (C.D. Cal. 2006).
Although the district court concluded that Fidelity was the “immediate ‘source’ ” of the information on which Talbot traded, (Id., citing Talbot at 1049) it held that based upon the fact that the SEC did not carry its burden of proving that Talbot, Fidelity, and LendingTree were “linked through a continuous chain of fiduciary relationships,” no liability could attach for Talbot’s actions. Id., citing Talbot at 1049-50. The district court also found a genuine issue of material fact as to whether the information on which Talbot traded was material. Id., citing Talbot at 1039-42, 1051 n.65.
The Ninth Circuit however disagreed with the district court’s holding. As a matter of law, the very nature of the information on which Talbot traded was confidential. Id., p. 7800, citing Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1046 (Del. Ch. 2004). The Ninth Circuit agreed with the SEC’s position that the information about the possible LendingTree acquisition went to the very heart of Talbot’s duties to Fidelity. Talbot learned of the LendingTree information from Foley at a meeting of the Board. Foley announced it to the Board to get a reading on whether the Board would vote Fidelity’s shares in favor of the transaction. Because Fidelity had a large stake in LendingTree’s stock, this decision would have a significant impact on Fidelity’s financials, a point that Foley emphasized to the Board by stating that Fidelity could potentially make $50 million if the deal went through.
Thus, the Ninth Circuit found that Talbot did misappropriate information from Fidelity, a source to which he owed a fiduciary duty arising from his position on its Board. Id., p. 77803, citing O’Hagan, 521 U.S. at 652. Fidelity was the rightful owner of the information, information that was both nonpublic and confidential. This conduct, assuming the information on which Talbot traded was material, falls squarely within the range of conduct the Supreme Court contemplated in O’Hagan.
With regard to the issue whether the information on which Talbot traded was material as a matter of law, the Ninth Circuit agreed with the district court’s finding that a genuine issue of material fact existed regarding materiality. Id., citing Talbot, 430 F. Supp. 2d at 1042. Specifically, the district court did not clearly err in determining that a genuine issue of material fact existed as to the materiality of the information on which Talbot traded. On the one hand, much of the deposition testimony would support a finding of materiality. For example, Foley informed the Board that Fidelity stood to make a $50 million profit on the acquisition. Thompson and Brent Bickett, Fidelity’s Vice President, testified that, based on Foley’s representations to the Board, they perceived the acquisition to be in the very advanced stages. Talbot purchased LendingTree stock just two days after hearing the information, and again six days later.
On the other hand, there was also evidence to support a finding that the information was immaterial. Most notably, Talbot remembered what was said at the meeting differently than some of the other directors. He recalled Foley saying, only generally, that “some person or company might be interested in acquiring LendingTree, Inc . . . . and that (Fidelity) would benefit if the transaction occurred.” In contrast with those who believed that the transaction was in the advanced stages, Talbot understood the transaction to be just a “rumor,” not a “factual statement.”
Therefore, the Ninth Circuit could not say that the district court clearly erred in determining that the information on which Talbot traded was not material as a matter of law, given the genuine issues of material fact, particularly as to what information was actually conveyed to the Fidelity Board.
On the basis of the foregoing, the Ninth Circuit reversed the district court’s decision and held that Talbot can be held liable under the misappropriation theory because he traded on confidential information received in his capacity as a member of Fidelity’s Board, but that a genuine issue of material fact as to the materiality of the information precludes judgment as a matter of law. The Ninth Circuit remanded the case for further proceedings consistent with its opinion.
View a PDF of the judicial opinion.Service
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