SEC v. Talbot ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SECURITIES AND EXCHANGE  No. 06-55561
COMMISSION,
Plaintiff-Appellant, D.C. No.
v.  CV-04-04556-
MMM
J. THOMAS TALBOT,
OPINION
Defendant-Appelle.

Appeal from the United States District Court
for the Central District of California
Margaret M. Morrow, District Judge, Presiding
Argued and Submitted
December 4, 2007—Pasadena, California
Filed June 30, 2008
Before: David R. Thompson, Kim McLane Wardlaw, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Wardlaw
7781
7784 SEC v. TALBOT
COUNSEL
Brian G. Cartwright, General Counsel, Andrew N. Vollmer,
Deputy General Counsel, Jacob H. Stillman, Solicitor, Ran-
dall W. Quinn, Assistant General Counsel, Michael L. Post,
Senior Counsel, Washington, D.C., for plaintiff-appellant
Securities and Exchange Commission.
Richard Marmaro, Lance A. Etcheverry, Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California; Preeta
D. Bansal, Timothy G. Nelson, Sarah E. McCallum, Of Coun-
sel, Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York, for defendant-appellee J. Thomas Talbot.
SEC v. TALBOT 7785
OPINION
WARDLAW, Circuit Judge:
J. Thomas Talbot, a member of the board of directors of
Fidelity National Financial, Inc., a Delaware corporation,
traded on confidential information about the impending acqui-
sition of LendingTree, Inc., which he received in his capacity
as a Fidelity director. We must decide 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 misap-
propriating information from Fidelity, in the absence of a
fiduciary duty of confidentiality owed to LendingTree by
Fidelity or Talbot when he executed the trades. We hold that
Talbot can be held liable, under the circumstances here, but
that a genuine issue of material fact exists as to the issue of
materiality. We therefore reverse and remand the district
court’s grant of summary judgment in favor of Talbot.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Facts
J. Thomas Talbot is a businessman and attorney who, for
the past thirty years, has served as a director on the boards of
several companies. In April 2003, Talbot sat on the Board of
Directors (the “Board”) of Fidelity National Financial, Inc.
(“Fidelity”), a publicly traded Delaware corporation and
national title insurance company. Fidelity owned approxi-
mately a 10 percent interest in LendingTree, Inc.
(“LendingTree”), an online lending and realty services
exchange, which is publicly traded on the NASDAQ National
Market System.
On April 18 or 19, 2003, LendingTree’s CEO, Douglas
Lebda, informed Brent Bickett, Fidelity’s Vice President, that
negotiations were proceeding for a third party to acquire
7786 SEC v. TALBOT
LendingTree. Lebda informed Bickett because, “as a signifi-
cant shareholder of [LendingTree], we knew that [Fidelity]
would need to ultimately consent to a transaction, if it hap-
pened.” Although Lebda did not state the name of the poten-
tial acquirer, Lebda indicated that the “majority of the
[LendingTree] Board was in favor of the transaction,” that the
acquirer “was not a competitor of Fidelit[y’s],” and that
Bickett “would need to keep this information confidential.”
Lebda explained that “the net share price was in the $14 to
$15 range” but did not recall discussing “whether Fidelity
would make a profit as a result of the acquisition.” Bickett
testified during his deposition that Lebda did not inform him
that the information was confidential, but that Bickett “had an
understanding that [the] information was confidential infor-
mation.” Bickett then relayed this information to William
Foley, Fidelity’s CEO.
On April 22, 2003, Fidelity held its quarterly board meet-
ing, which Talbot attended. Toward the end of the four- or
five-hour meeting, Foley presented to the Board the informa-
tion from Bickett for a Board discussion as to whether Fidel-
ity should agree to refrain from selling its LendingTree stock
during the pendency of the transaction and also “agree to
[vote Fidelity’s] shares in favor of the transaction.” Foley told
the Board the “exciting information” that “Lending Tree was
going to be acquired.” Foley also informed the Board that
“[w]e didn’t know who the acquirer was at that time because
[LendingTree] would not disclose it to us,” but that Fidelity
“would make about $50 million on the transaction.” Accord-
ing to Terry Christensen, another Board member, Foley
informed the Board that Fidelity’s stock in LendingTree
“would be acquired at a very attractive price,” between $16
and $18, which represented a 23-39 percent increase over
LendingTree’s closing price of $12.97 per share on April 22,
2003. Talbot remembered the meeting differently, declaring
that, although he could “not recall the exact words spoken . . .
some person or company might be interested in acquiring
LendingTree, Inc. . . . and [Fidelity] would benefit if the
SEC v. TALBOT 7787
transaction occurred.” The response from the Board at the
meeting was positive. According to Foley, “everyone said . . .
it sounds like a great idea. . . . No one disagreed with it.”
Although Foley did not tell the Board that the information
was confidential, one Board member, Cary Thompson, said
“something to the effect that this is inside information, no one
trade in the stock. Make sure you don’t do anything with the
stock.” Thompson said this “plenty loud. It was loud enough
to hear him.” All Board members present at the meeting,
except for Talbot, considered the LendingTree information to
be confidential.
Various directors testified at depositions to their under-
standing of how far along the negotiations had proceeded
between LendingTree and the unnamed acquirer, as conveyed
by Foley: “far along, and it would be announced as a deal
shortly thereafter” (Thompson); “advanced discussions”
(Bickett); and that “it looked like there was going to be a
transaction” (Christensen). Talbot interpreted Foley’s words
as far less definite, understanding the information about Lend-
ingTree to be a “rumor,” not a “factual statement.” Talbot
wrote “LENDING TREE” at the top of his copy of the meet-
ing agenda; those were the only notes he took during the
meeting.
On April 24, 2003, two days after the meeting, Talbot pur-
chased on margin 5000 shares of LendingTree at approxi-
mately $13.50 per share for a total of $67,500. Talbot testified
that Foley’s comments at the April 22, 2003 regarding Lend-
ingTree “triggered [his] conduct on April 23rd to look into
[LendingTree] more carefully.” A number of factors influ-
enced his decision to purchase the stock: Fidelity had invested
in it; it was a real estate company, which he considered to be
a good buy; interest rates would likely remain low; the high-
tech market was experiencing a resurgence; and, based on the
“rumor” at the April 22 meeting, other people were clearly
7788 SEC v. TALBOT
interested in it, so he should be as well. Talbot “wanted to buy
before anything happened.”
On April 25, 2003, LendingTree sent Fidelity a written let-
ter agreement restricting the manner in which Fidelity could
use any confidential information it received from Lending-
Tree in connection with the proposed tender offer. The agree-
ment stated:
FNF [Fidelity] may disclose Confidential Informa-
tion to its directors, officers, employees, partners,
affiliates, agents, advisors or representatives . . . to
the extent necessary to permit such Representatives
to assist FNF in evaluating and analyzing a Possible
Transaction, provided, however, that FNF shall
instruct each such Representative to be bound by the
terms of this Agreement to the same extent as if they
were parties hereto and FNF shall be responsible for
any breach of this Agreement by any of its Repre-
sentatives . . . .
The directors were not advised of the confidentiality agree-
ment.
Talbot continued to monitor LendingTree’s stock closely,
and, after being satisfied that “the price was moving up . . .
[a]nd the volume was solid,” on April 30, 2003, he purchased
on margin an additional 5000 shares at $14.50 per share for
$72,500.
On May 5, 2003, three major events occurred, in the fol-
lowing sequence. First, Fidelity executed an agreement with
USA Interactive Corporation (the acquiring company) and
LendingTree to vote its shares in favor of the acquisition. Sec-
ond, LendingTree and USA Interactive issued a press release
announcing the acquisition. Third, LendingTree’s stock rose
roughly 41 percent on the news, immediately after which Tal-
bot sold all of his LendingTree shares for a profit of
SEC v. TALBOT 7789
$67,881.20. LendingTree stock closed on Monday, May 5 at
$20.72, up $6.03 from its previous closing price of $14.69 on
Friday, May 2. The Securities and Exchange Commission
(“SEC”) commenced an investigation into Talbot’s trading
activity. Talbot resigned from the Board on September 19,
2003.
B. District Court Proceedings
On June 23, 2004, the SEC brought a civil action against
Talbot in the District Court for the Central District of Califor-
nia. 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 Feb-
ruary 14, 2006. Ruling on the SEC’s “misappropriation theo-
ry” of liability, see generally 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 “origi-
nating source” of the information on which Talbot traded.
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. at 1049, it held that because the SEC did not carry
its burden of proving that Talbot, Fidelity, and LendingTree
were “linked through a continuous chain of fiduciary relation-
ships,” no liability could attach for Talbot’s actions. Id. 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. at 1039-42, 1051 n.65.
II. JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction pursuant to 15 U.S.C.
§§ 78u(d)-(e) and 78aa, which confer jurisdiction in the dis-
7790 SEC v. TALBOT
trict courts over violations of federal securities laws. We have
jurisdiction over “final decisions” of the district courts pursu-
ant to 28 U.S.C. § 1291.
We review a district court’s grant of summary judgment de
novo. Oak Harbor Freight Lines, Inc. v. Sears Roebuck, &
Co., 513 F.3d 949, 954 (9th Cir. 2008). “Viewing the evi-
dence in the light most favorable to the nonmoving party, we
must determine whether there are genuine issues of material
fact and whether the district court correctly applied the rele-
vant substantive law.” Id. However, “[q]uestions of material-
ity, scienter, and reliance are mixed questions of law and fact,
but ones involving assessments peculiarly within the province
of the trier of fact. They are therefore reviewed under the
‘clearly erroneous’ standard.” Arrington v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir.
1981) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438, 450 (1976)).
III. DISCUSSION
A. The Misappropriation Theory
Section 10(b) of the Exchange Act provides:
It shall be unlawful for any person, directly or indi-
rectly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility
of any national securities exchange . . . . [t]o use or
employ, in connection with the purchase or sale of
any security registered on a national securities
exchange . . . any manipulative or deceptive device
or contrivance in contravention of such rules and
regulations as the Commission may prescribe as nec-
essary or appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78j(b). Pursuant to § 10(b), the SEC promulgated
Rule 10b-5, which provides:
SEC v. TALBOT 7791
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumental-
ity of interstate commerce, or of the mails or of any
facility of any national securities exchange,
(a) To employ any device, scheme, or arti-
fice to defraud,
(b) To make any untrue statement of a
material fact or to omit to state a material
fact necessary in order to make the state-
ments made, in the light of the circum-
stances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course
of business which operates or would oper-
ate as a fraud or deceit upon any person, in
connection with the purchase or sale of any
security.
17 C.F.R. § 240.10b-5.
[1] Traditionally, § 10(b) and Rule 10b-5 have reached only
what is termed “classical” insider trading. “Under the ‘tradi-
tional’ or ‘classical theory’ of insider trading liability, § 10(b)
and Rule 10b-5 are violated when a corporate insider trades
in the securities of his corporation on the basis of material,
nonpublic information.” O’Hagan, 521 U.S. at 651-52. Such
trading qualifies as a “deceptive device” under § 10(b)
because “ ‘a relationship of trust and confidence [exists]
between the shareholders of a corporation and those insiders
who have obtained confidential information by reason of their
position with that corporation.’ ” Id. at 652 (quoting Chiarella
v. United States, 445 U.S. 222, 228 (1980) (alteration in origi-
nal)). The relationship of trust and confidence between the
trader and the shareholders of the corporation in which he
trades “gives rise to a duty to disclose [or to abstain from trad-
7792 SEC v. TALBOT
ing] because of the ‘necessity of preventing a corporate
insider from . . . taking unfair advantage of . . . uninformed
. . . stockholders.’ ” Id. (quoting Chiarella, 445 U.S. at 228-29(alteration in original)).
Liability under the classical theory was not without limit,
however, as it did not reach trading by an outsider who owed
no fiduciary relationship to the corporation in whose shares he
traded. For example, in Chiarella v. United States, the
Supreme Court held that an employee of a financial printer
who traded in securities of the targets of the printer’s clients’
takeover bids could not be found guilty of insider trading. The
printer, and derivatively, the employee, were not insiders of
and had no duty to the targets, the entities in whose stock the
employee traded. Chiarella, 445 U.S. at 231. The Court made
clear that there is no “general duty between all participants in
market transactions to forgo actions based on material, non-
public information.” Id. at 233. Rather, a duty to disclose or
abstain from trading “arises from a specific relationship
between two parties.” Id.; see also Dirks v. SEC, 463 U.S.
646, 654 (1983) (“We were explicit in Chiarella in saying
that there can be no duty to disclose where the person who has
traded on inside information ‘was not [the corporation’s]
agent, . . . was not a fiduciary, [or] was not a person in whom
the sellers [of the securities] had placed their trust and confi-
dence.’ ” (quoting Chiarella, 445 U.S. at 232) (alterations in
original)).
[2] In Chiarella, the United States had argued that the
employee “breached a duty to the acquiring corporation when
he acted upon information that he obtained by virtue of his
position as an employee of a printer employed by the corpora-
tion,” but the majority did not address this question because
it was not submitted to the jury. Chiarella, 445 U.S. at
235-36. In 1997, the Supreme Court gave its answer, recog-
nizing a “complementary” theory of liability referred to as the
“misappropriation” theory. O’Hagan, 521 U.S. at 652. Under
this theory, “a person commits fraud ‘in connection with’ a
SEC v. TALBOT 7793
securities transaction, and thereby violates § 10(b) and Rule
10b-5, when he misappropriates confidential information for
securities trading purposes, in breach of a duty owed to the
source of the information.” Id. The misappropriation theory
reaches trading by corporate outsiders, not insiders; therefore,
as a corporate outsider, the misappropriator owes no duty to
the investor with whom he trades, a requirement for liability
under the classical theory of insider trading. Rather, “[i]n lieu
of premising liability on a fiduciary relationship between
company insider and purchaser or seller of the company’s
stock, the misappropriation theory premises liability on a
fiduciary-turned-trader’s deception of those who entrusted
him with access to confidential information.” Id. “Under this
theory, a fiduciary’s undisclosed, self-serving use of a princi-
pal’s information to purchase or sell securities, in breach of
a duty of loyalty and confidentiality, defrauds the principal of
the exclusive use of that information.” Id. “Because the
deception essential to the misappropriation theory involves
feigning fidelity to the source of information, if the fiduciary
discloses to the source that he plans to trade on the nonpublic
information, there is no ‘deceptive device’ and thus no
§ 10(b) violation . . . .” Id. at 655.
B. Talbot’s Liability Under the Misappropriation
Theory
[3] Because Talbot traded in LendingTree securities—a
corporation in which he was not an insider—liability can
attach to his conduct only under the misappropriation theory.
For a court to hold Talbot liable under the misappropriation
theory, the SEC must demonstrate that Talbot knowingly mis-
appropriated confidential, material, and nonpublic informa-
tion for securities trading purposes, in breach of a duty arising
from a relationship of trust and confidence owed to the source
of the information. See SEC v. Clark, 915 F.2d 439, 443 (9th
Cir. 1990).
Neither party challenges the district court’s findings that (1)
the SEC failed to carry its burden of showing that Fidelity
7794 SEC v. TALBOT
owed a fiduciary duty to LendingTree; (2) the information
was nonpublic; or (3) Talbot knowingly used the LendingTree
information to trade in LendingTree securities. Thus, for the
SEC to prevail on appeal, it must demonstrate that (1) Talbot
breached a fiduciary duty arising from a relationship of trust
and confidence owed to the source of the information on
which he traded; and (2) the information on which Talbot
traded was material.
1. Breach of Duty
The SEC contends that because “Talbot had a duty to . . .
Fidelity, to keep information about the LendingTree transac-
tion confidential, and [because] he secretly breached that duty
by trading securities for personal profit,” he can be held liable
under the misappropriation theory.1 We agree.2
In United States v. O’Hagan, the leading Supreme Court
decision addressing the misappropriation theory, the SEC
brought an action against James O’Hagan under, inter alia,
§ 10(b) and Rule 10b-5. O’Hagan, 521 U.S. at 648. O’Hagan
was a partner in the law firm Dorsey & Whitney, which repre-
sented Grand Metropolitan PLC (“Grand Met”) in connection
with a potential tender offer for the Pillsbury Company’s
common stock. Id. at 647. O’Hagan did not work on the mat-
ter, but he used information he received in his partnership
capacity at the firm to purchase and sell Pillsbury Company
1
Contrary to Talbot’s contention, the SEC did not waive this argument
below, as it raised the argument numerous times in its moving papers.
2
It is unclear from the record before us whether Fidelity and, by exten-
sion, Talbot, owed a fiduciary duty arising from a relationship of trust and
confidence to LendingTree. The district court determined that the SEC had
not carried its burden of proving that such a duty existed. The SEC has not
appealed that holding, arguing that Talbot’s relationship to Fidelity alone
is sufficient to sustain liability. Accordingly, the SEC has waived its con-
tention below that Talbot and Fidelity owed a fiduciary duty arising from
a relationship of trust and confidence to LendingTree, and we proceed
under the assumption that they did not.
SEC v. TALBOT 7795
securities, netting him more than $4.3 million. Id. at 647-48.
The Supreme Court held that “criminal liability under § 10(b)
may be predicated on the misappropriation theory.” Id. at 650.
The Court noted that “it [was O’Hagan’s] failure to disclose
his personal trading to Grand Met and Dorsey, in breach of
his duty to do so, that made his conduct ‘deceptive’ within the
meaning of [§] 10(b).” Id. at 660 (internal quotation marks
omitted and alterations in original); cf. Clark, 915 F.2d at 453(“[A]n employee’s knowing misappropriation and use of his
employer’s material nonpublic information regarding its
intention to acquire another firm constitutes a violation of
§ 10(b) and Rule 10b-5.”).
The district court interpreted the misappropriation theory as
requiring that “the trader and the originating source of the
nonpublic information [be] linked through a continuous chain
of fiduciary relationships: The employee [must owe] a duty to
his employer to refrain from exploiting the information, and
the employer in turn [must owe] the same duty to the corpo-
rate client.” Talbot, 430 F. Supp. 2d at 1049-50. This interpre-
tation is understandable, for many cases addressing the
misappropriation theory involve a “continuous chain” of
duties. See, e.g., SEC v. Cherif, 933 F.2d 403, 406, 410-11
(7th Cir. 1991) (holding that a bank’s former employee
breached his fiduciary duty to the bank by misappropriating
confidential information regarding the bank’s clients’ pro-
spective financial transactions); SEC v. Materia, 745 F.2d
197, 202 (2d Cir. 1984) (holding that the employee of a finan-
cial printing company misappropriated information about pro-
posed tender offers from documents submitted by the printing
company’s clients in breach of a fiduciary duty to his
employer); SEC v. Musella, 578 F. Supp. 425, 438-39
(S.D.N.Y. 1984) (holding that a law firm’s employee
breached his duty of confidentiality to the law firm and its cli-
ents by misappropriating material nonpublic information
about the firm’s clients).
[4] Although a continuous chain of duties existed in each
of the cases relied upon by the district court, a continuous
7796 SEC v. TALBOT
chain of duties is not a requirement for liability to attach
under the misappropriation theory. In O’Hagan, the Supreme
Court held that O’Hagan had breached two independent
duties: (1) his duty to Dorsey & Whitney, his law firm; and
(2) his duty to Grand Met, the corporation that his law firm
represented. That a continuous chain of duties flowed from
O’Hagan to Dorsey & Whitney to Grand Met is of no
moment, as the Court never intimated that such a chain was
necessary. Indeed, the Court declared that “[w]here . . . a per-
son trading on the basis of material, nonpublic information
owes a duty of loyalty and confidentiality to two entities or
persons—for example, a law firm and its client—but makes
disclosure to only one, the trader may still be liable under the
misappropriation theory.” O’Hagan, 521 U.S. at 655 n.7.
Thus, O’Hagan’s relationship with Dorsey and Whitney was
sufficient to support liability under the misappropriation the-
ory. Further, the Court explained that liability attached to
O’Hagan’s conduct because he owed a fiduciary duty to dis-
close the information “to the source of the information, here,
Dorsey & Whitney and Grand Met.” Id. at 655 n.6. The dis-
trict court misinterpreted the misappropriation theory as
requiring that the duty of confidentiality be owed to the “orig-
inating source” of the information. O’Hagan stated quite
clearly that the duty must be owed only to the “source”; we
decline to read an “originating source” requirement into
O’Hagan.
[5] This interpretation of O’Hagan is confirmed by United
States v. Carpenter. In Carpenter, employees of the Wall
Street Journal participated in a fraudulent scheme in which
their tippees traded based on information to be included in the
paper’s influential “Heard on the Street” column. 791 F.2d
1024, 1026 (2d Cir. 1986), aff’d by an evenly divided Court,
484 U.S. 19, 24 (1987). The Wall Street Journal did not trade
in the securities and had not received the information from
clients that intended to do so. The Second Circuit upheld their
convictions under § 10(b) and Rule 10b-5. Id. at 1026. The
Second Circuit rejected the argument that “it was not enough
SEC v. TALBOT 7797
that [the employee] breached a duty of confidentiality to his
employer, the Wall Street Journal, in misappropriating and
trading on material nonpublic information[, and that] he
would have to have breached a duty to the corporations or
shareholders thereof whose stock [his tippees] purchased or
sold on the basis of that information.” Id. at 1029. Noting that
such an interpretation of the misappropriation theory would
be too narrow, the Second Circuit reasoned, “the misappropri-
ation theory more broadly proscribes the conversion by ‘insid-
ers’ or others of material non-public information in
connection with the purchase or sale of securities. . . . It is
precisely such conversion that serves as the predicate for the
convictions herein.” Id.
[6] The Second Circuit thus found liability in Carpenter
where the employee breached his duty to the Wall Street Jour-
nal, his employer and the immediate source of the information
on which his tippees traded. Similarly, Talbot traded on infor-
mation he received from Fidelity, the immediate source and
rightful owner of the information on which he traded. The
Carpenter decision squarely supports our conclusion that a
continuous chain of duties is not required for liability under
the misappropriation theory. Our reliance on the Carpenter
decision is complicated only by the Supreme Court’s affir-
mance without comment as to the misappropriation theory.
The Court instead focused its discussion on the mail and wire
fraud violations at issue there. Carpenter v. United States, 484
U.S. at 24-28 (“The Court is evenly divided with respect to
the convictions under the securities laws and for that reason
affirms the judgment below on those counts.”); see also
Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221, 234
n.7 (1987) (“[A]n affirmance by an equally divided Court is
not entitled to precedential weight.”). However, Justice Gins-
burg breathed new life into Carpenter’s application of the
misappropriation theory in O’Hagan, where she explained
that Carpenter is “a particularly apt source of guidance” in
securities cases. O’Hagan, 521 U.S. at 654 (internal quotation
7798 SEC v. TALBOT
marks omitted). Noting that Carpenter involved “fraud of the
same species,” Justice Ginsburg analogized to property rights:
A company’s confidential information, we recog-
nized in Carpenter, qualifies as property to which
the company has a right of exclusive use. The undis-
closed misappropriation of such information, in vio-
lation of a fiduciary duty, the Court said in
Carpenter, constitutes fraud akin to embezzlement—
the fraudulent appropriation to one’s own use of the
money or goods entrusted to one’s care by another.
Id. (citations and quotation marks omitted).
[7] The Court’s adoption of Carpenter’s reasoning in sup-
port of its holding on the misappropriation theory leads to the
conclusion that Talbot’s conduct is encompassed within the
misappropriation theory of securities liability. As in Carpen-
ter and O’Hagan, Talbot, as a member of Fidelity’s Board,
owed a duty arising from a relationship of trust and confi-
dence to Fidelity, the source of the information on which he
traded. The information on which Talbot traded was confiden-
tial, as it was property “entrusted” to him by Fidelity in his
capacity as a Fidelity director. This is textbook misappropria-
tion.
[8] Talbot contends that “[n]o reasonable factfinder could
conclude that Mr. Talbot was obligated to keep the Lending-
Tree information confidential.” We disagree. Although the
Court did not define the precise contours of the fiduciary duty
captured by the misappropriation theory, it is clear that Talbot
falls within O’Hagan’s ambit. In O’Hagan, the Court found
that a partner in a law firm is in a relationship of trust and
confidence with his firm. It follows that Talbot, as a member
of Fidelity’s Board of Directors, was also in a relationship of
trust and confidence with Fidelity. This conclusion is sup-
ported by nearly seven decades of Delaware law, and com-
mon sense: “Corporate officers and directors are not permitted
SEC v. TALBOT 7799
to use their position of trust and confidence to further their
private interests. While technically not trustees, they stand in
a fiduciary relation to the corporation and its stockholders.”
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. Ch. 1939); see also
Teren v. Howard, 322 F.2d 949, 953 (9th Cir. 1963) (quoting
the above-quoted language approvingly); Boyer v. Wilmington
Materials, Inc., 754 A.2d 881, 907 (Del. Ch. 1999)
(“[D]irectors of corporations organized under Delaware law
owe a fiduciary duty to the corporations upon whose boards
they serve and to the stockholders of those corporations.”
(internal quotations marks and citation omitted)); Restatement
(Second) of Agency § 395 (“Unless otherwise agreed, an
agent is subject to a duty to the principal not to use or to com-
municate information confidentially given him by the princi-
pal or acquired by him during the course of or on account of
his agency or in violation of his duties as agent, in competi-
tion with or to the injury of the principal, on his own account
or on behalf of another, although such information does not
relate to the transaction in which he is then employed, unless
the information is a matter of general knowledge.”); William
E. Knepper and Dan A. Bailey, 1 LIABILITY OF CORPORATE OFFI-
CERS AND DIRECTORS § 4-23 (7th ed. 2007) (“A corporation is
entitled to keep confidential information obtained and assem-
bled in the course of conducting its business. Such informa-
tion is a type of property to which the corporation has an
exclusive right. A director has a duty to use reasonable dili-
gence to protect and safeguard his corporation’s property, and
he may not use it in his own personal interests, even if he or
she causes no injury to the corporation.”) (footnotes omitted).
[9] Talbot further contends that the information on which
he traded was not confidential. He relies on his belief that the
LendingTree information was a “rumor,” and the fact that
Foley did not indicate the information was confidential. We
find these arguments to be unpersuasive. As a matter of law,
the very nature of the information on which Talbot traded was
confidential. See, e.g., Hollinger Int’l, Inc. v. Black, 844 A.2d
1022, 1046 (Del. Ch. 2004) (holding that “not publicly avail-
7800 SEC v. TALBOT
able . . . and sensitive” advice the Chairman of the Board and
Chief Executive Officer received in his official capacity
regarding his company’s value in connection with a potential
acquisition of one of the company’s key assets was “confiden-
tial”), aff’d, 872 A.2d 559 (Del. 2005); Brophy v. Cities Serv.
Co., 70 A.2d 5, 7-8 (Del. Ch. 1949) (holding that an employ-
ee’s nonpublic knowledge that his company intended to
acquire its own capital stock was confidential information).
As the SEC points out, “the information about the possible
LendingTree acquisition went to the very heart of Talbot’s
duties to Fidelity.” Talbot learned of the LendingTree infor-
mation from Foley, the CEO of Fidelity, at a meeting of the
Board of Directors. 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 big impact
on Fidelity’s financials, a point that Foley made explicit by
informing the Board that Fidelity could potentially make $50
million if the deal went through. This was not a passing refer-
ence to a company in which Fidelity had no interest; rather,
the weight of the evidence counsels that Foley’s comments to
the Board, and the Board’s subsequent discussion of the trans-
action, would make clear to any Board member—especially
an individual who has sat on boards of directors for over three
decades—that the information was confidential and not to be
used for personal gain. Indeed, every other director present at
the meeting considered the information to be confidential.
[10] Talbot’s use of Fidelity’s confidential information, in
breach of his duty to disclose that he intended to use that
information before doing so, was in direct contravention of
the purposes of the Exchange Act. As the Court recognized in
O’Hagan,
an animating purpose of the Exchange Act . . . [is]
to insure honest securities markets and thereby pro-
mote investor confidence. Although informational
disparity is inevitable in the securities markets,
SEC v. TALBOT 7801
investors likely would hesitate to venture their capi-
tal in a market where trading based on misappropri-
ated nonpublic information is unchecked by law. An
investor’s informational disadvantage vis-á-vis a
misappropriator with material, nonpublic informa-
tion stems from contrivance, not luck; it is a disad-
vantage that cannot be overcome with research or
skill.
O’Hagan, 521 U.S. at 658-59 (citing Victor Brudney, Insid-
ers, Outsiders, and Informational Advantages Under the Fed-
eral Securities Laws, 93 HARV. L.REV. 322, 356 (1979) (“If
the market is thought to be systematically populated with
. . . transactors [trading on the basis of misappropriated infor-
mation] some investors will refrain from dealing altogether,
and others will incur costs to avoid dealing with such transac-
tors or corruptly to overcome their unerodable informational
advantages.”)).
Barbara Aldave, Professor of Business Law at the Univer-
sity of Oregon School of Law, whose work was relied upon
extensively by the Court in O’Hagan and our court in SEC v.
Clark, provides key insights into the misappropriation theory:
Properly understood, the misappropriation theory
only bars trading on the basis of information that the
wrongdoer converted to his own use in violation of
some fiduciary, contractual, or similar obligation to
the owner or rightful possessor of the information.
The misappropriation theory, so understood, com-
ports well with our intuition about what is wrong
with trading on nonpublic information. Most of us
would not perceive such trading to be unfair merely
because one trading party knows more than another.
. . . On the other hand, no one likes to play a game
with an opponent who has loaded the dice. We think
that those who have special access to information,
7802 SEC v. TALBOT
because of employment or other relationships,
should be barred from using that information to gain
an advantage over the rest of us.
Barbara Bader Aldave, Misappropriation: A General Theory
of Liability for Trading on Nonpublic Information, 13
HOFSTRA L.REV. 101, 12-23 (1984).
The legislative intent and academic commentary relied on
by the Court in O’Hagan support our conclusion that Talbot’s
conduct is encompassed within the misappropriation theory.
Talbot traded on the LendingTree information in violation of
his fiduciary duty to Fidelity to maintain that information in
trust and confidence. Talbot contends that, even so, the SEC
cannot prevail because it cannot demonstrate that Fidelity was
harmed by his conduct. We cannot determine from the record
before us whether Talbot’s trading injured Fidelity, but it
most certainly injured the trading public. The Court in
O’Hagan stated that “[a] misappropriator who trades on the
basis of material, nonpublic information, in short, gains his
advantageous market position through deception; he deceives
the source of the information and simultaneously harms mem-
bers of the investing public.” O’Hagan, 521 U.S. at 656 (cit-
ing Aldave, 13 HOFSTRA L.REV. at 120-21 (“[O]ne who
misappropriates confidential information and uses it in his
securities trading deceives the rightful owner or possessor of
the information, but causes economic harm to other inves-
tors.”)). The failure to hold a person in Talbot’s trusted posi-
tion who traded on information acquired by him in that
capacity would diminish the public perception of the markets
as “honest,” as investors would understand that board
members—those who have superior access to information
about the businesses in which their companies invest—are
free to profit off the informational advantages they possess by
virtue of their rank.
[11] As Professor Aldave astutely recognizes, investors do
not expect the playing field to be level, but they do expect that
SEC v. TALBOT 7803
those who “have special access to information, because of
employment or other relationships, should be barred from
using that information to gain an advantage over the rest of
us.” Aldave, 13 HOFSTRA L.REV. at 123. Talbot misappropri-
ated information from Fidelity, a source to which he owed a
fiduciary duty arising from a relationship of trust and confi-
dence by virtue of his position on its Board. Fidelity was the
rightful owner of the information, information that was both
nonpublic and confidential. This conduct, assuming the infor-
mation on which Talbot traded was material, falls squarely
within the range of conduct the Court contemplated in
O’Hagan. Accordingly, we hold that, as a matter of law, Tal-
bot “misappropriate[d] confidential information for securities
trading purposes, in breach of a duty owed to the source of the
information.” O’Hagan, 521 U.S. at 652.
2. Materiality
The SEC also contends that the LendingTree information
on which Talbot traded was material as a matter of law. The
district court found that a genuine issue of material fact exists
regarding materiality. Talbot, 430 F. Supp. 2d at 1042. We
agree with the district court.
An omitted fact is material if there is a substantial likeli-
hood that a reasonable investor would consider it important in
deciding whether to buy or sell securities. Basic Inc. v. Levin-
son, 485 U.S. 224, 231-32 (1988). “[T]o fulfill the materiality
requirement ‘there must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total
mix’ of information made available.’ ” Id. (citation omitted).
“Questions of materiality . . . involv[e] assessments peculiarly
within the province of the trier of fact.” Arrington, 651 F.2d
at 619 (citing TSC Indus., 426 U.S. at 450).
Courts look to a variety of factors to determine whether
information is “material” under § 10(b) and Rule 10b-5. In
7804 SEC v. TALBOT
assessing “the probability that the event will occur, a fact-
finder will need to look to indicia of interest in the transaction
at the highest corporate levels,” such as “board resolutions,
instructions to investment bankers, and actual negotiations
between principals or their intermediaries . . . .” Basic, 485
U.S. at 239. In assessing “the magnitude of the transaction to
the issuer of the securities allegedly manipulated, a factfinder
will need to consider such facts as the size of the two corpo-
rate entities and of the potential premiums over market
value.” Id. Other factors that courts have considered are (1) an
increase in the stock price after public announcement of the
merger, see SEC v. Sekhri, No. 98 Civ. 2320, 2002 WL
31100823, at *13 (S.D.N.Y. July 22, 2002); (2) whether the
information comes from an insider or some other source, see
SEC v. Mayhew, 121 F.3d 44, 52 (2d Cir. 1997); and (3)
whether information concerning a potential acquisition is
“[un]accompanied by specific quantification or otherwise
implied certainty.” See Elliott Assocs., L.P. v. Covance, Inc.,
No. 00 Civ. 4115 SAS, 2000 WL 1752848, at *10 (S.D.N.Y.
Nov. 28, 2000).
The district court did not clearly err in determining that a
genuine issue of material fact exists 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. Foley informed the Board that Fidelity stood to
make a $50 million profit on the acquisition. Thompson and
Bickett 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. The stock rose roughly 41 percent upon announcement
of the acquisition, immediately after which Talbot sold all of
his LendingTree stock. And, perhaps most tellingly, Talbot
testified that he purchased the stock on margin because he
“wanted to buy before anything happened.”
On the other hand, there is also evidence to support a find-
ing that the information was immaterial. Most notably, Talbot
SEC v. TALBOT 7805
remembers 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.” Moreover, he asserted that no one dis-
cussed “when [the acquisition] would occur.” This account is
generally confirmed by Christensen, who testified that “Mr.
Foley was indicating that it looked like [Fidelity’s] stock
would be sold. I mean, you know, one never knows for sure,
but that’s what it looked like.” Both Talbot’s and Christen-
sen’s deposition testimony refute the countervailing evidence
that Foley communicated a detailed and definite description
of the worth of the potential acquisition. Therefore, we cannot
say that the district court clearly erred in determining that the
information on which Talbot traded was not material as a mat-
ter of law, given the genuine issues of material fact, particu-
larly as to what information was actually conveyed to the
Fidelity Board.
IV. CONCLUSION
[12] For the foregoing reasons, we REVERSE the district
court and hold that Talbot can be held liable under the misap-
propriation theory because he traded on confidential informa-
tion 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.
REVERSED and REMANDED.