Wilson Sonsini, Bergeson Eliopoulos and Shartsis Friese Firms Win Summary Judgment Against SEC in Insider Trading Case.
PALO ALTO, Calif.--(BUSINESS WIRE)--April 17, 2000
In a decision that could have widespread implications for SEC insider trading cases, Judge Spencer Williams of the United States District Court for the Northern District of California granted summary judgment motions filed by Wilson Sonsini Goodrich & Rosati; Shartsis Friese & Ginsburg; and Bergeson & Eliopoulos in a widely publicized action filed by the Securities and Exchange Commission in November 1998. In his 34-page opinion, Judge Williams rejected the SEC's theory that illegal insider trading may be inferred based on circumstantial evidence where the SEC could not provide sufficient evidence showing the actual inside information that the defendants allegedly used in trading, or how the defendants acquired that information.
The Court held that the SEC "may not rest on evidence that would require a jury to speculate that the defendant possessed that information." The Court rejected the SEC's contention that illegal insider trading may be assumed because a corporate employee worked in an office with open cubicles, where confidential documents might be located, or had contact with senior management who allegedly possessed the inside information. Recognizing the potential impact of that theory on Silicon Valley, the Court held that under such a theory, "anyone who works in an office with open cubicles, like virtually everyone at Silicon Valley, and who has merely normal professional relationships with senior management must be considered to have `access to confidential information' for insider trading purposes." In the first major lower court interpretation of the Ninth Circuit's decision in U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998), Judge Williams held that Smith requires the SEC to show that a defendant in an insider trading action actually possessed and used particular, material nonpublic information in deciding to trade.
In the action, SEC v. Hanh Truong, et al, filed in Federal Court in San Jose, the SEC charged that Hanh Truong, a former software engineer manager at Molecular Dynamics, Inc., a Sunnyvale, California biotech company, knew that the quarter ending April 3, 1994, would be substantially below expectations. Molecular's stock price dropped when the Company announced the quarterly results on April 6, 1994. The SEC alleged that Truong sold Molecular stock while in possession of that information, and tipped two brothers, Hieu and Hen, and a friend Christopher Nguyen, who also sold and sold short Molecular stock based on the information. The SEC alleged that all defendants obtained approximately $430,000 in illegal profits. The Court dismissed all claims against Hieu Truong and Nguyen. The Court dismissed all claims based on the trading of Hanh Truong, the Molecular employee, and the claims based on most of the trades by Hen Troung. The Court held that the SEC had provided sufficient evidence to proceed to the jury on allegations that Hanh Truong may have learned at some point that Molecular's quarter would be poor, and provided that information to Hen.
Jared Kopel, Peri Erlanger and Larry Hing of Wilson Sonsini Goodrich & Rosati represented the lead defendant, Hanh Troung. Daniel Bergeson and Marilyn Lerner of Bergeson Eliopoulos in San Jose represented Christopher Nguyen. Jahan Raissi of Shartsis Friese & Ginsburg in San Francisco represented Hieu Troung. Hoa Truong of Fountain Valley, California represented Hen Truong.
The SEC contended that the defendants' allegedly "suspicious trading" combined with Hanh Truong's alleged "access" to information about the poor quarter was sufficient to provide the necessary inference of illegal trading to go a jury. Judge Williams disagreed, holding that "Suspicious trading by itself cannot suffice to warrant an inference that an alleged tipper, the first link on the information chain, traded on the basis of material non-public information." The Court held that a finding that Truong possessed material nonpublic information would require impermissible speculation on the part of a jury, and that despite many years of investigation, the SEC had failed to garner direct or circumstantial evidence that Truong possessed material nonpublic information at the time of his stock sales. The Court held that since there was no evidence that Truong possessed material nonpublic information at this time, he could not have conveyed such information to his brothers. The Court also held that the claims against Nguyen must be dismissed because the SEC presented no evidence of any contact between Hanh Truong and Nguyen before Nguyen's own sales.
Based in Palo Alto, Wilson Sonsini Goodrich & Rosati specializes in representing high technology companies in all stages of growth. The firm's more than 600 lawyers regularly advise more than 300 public companies and 3,000 emerging growth companies, as well as the venture capital firms and investment banks that support them. WSGR's home page is located at www.wsgr.com.
About Bergeson & Eliopoulos, LLP
Based in San Jose, Bergeson & Eliopoulos, LLP is a 15 lawyer Silicon Valley law firm which specializes in securities, intellectual property and business litigation.
About Shartsis Friese & Ginsburg, LLP
Based in San Francisco, Shartsis, Friese & Ginsburg, LLP is a mid-sized firm committed to providing the best legal services available from any firm of any size. We handle litigation and business transactions to provide continuity, responsiveness and timely work product of the highest caliber in a cost-effective manner, and we work closely with our clients toward that end.