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97 F.3d 663, Fed. Sec. L. Rep. P 99,326


(Cite as: 97 F.3d 663)

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97 F.3d 663, Fed. Sec. L. Rep. P 99,326


(Cite as: 97 F.3d 663)

United States Court of Appeals,


Second Circuit.
UNITED STATES of America, Appellee,
v.
William MYLETT, Robert Allen, Robert Flanagan,
Thomas Flanagan and Albert Brody, Defendants,
Joseph Cusimano, Defendant-Appellant.

Under misappropriation theory of Rule 10b-5,


insider trading occurs whenever a person trades while
in knowing possession of misappropriated and material
nonpublic information. Securities Exchange Act of
1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R.
240.10b-5.
[2] Securities Regulation 349B

No. 2313, Docket 96-1309.


Argued Aug. 8, 1996.
Decided Oct. 4, 1996.

60.28(12)

349B Securities Regulation


349BI Federal Regulation
349BI(C) Trading and Markets
349BI(C)7 Fraud and Manipulation
Defendant was convicted of insider trading, in
349Bk60.17 Manipulative, Deceptive or
violation of Rule 10b-5, and his sentence was enhanced Fraudulent Conduct
for perjury, in the United States District Court for the
349Bk60.28 Nondisclosure; Insider
Southern District of New York, John S. Martin, Jr., J.Trading
Defendant appealed. The Court of Appeals, Calabresi,
349Bk60.28(10) Matters to Be
Circuit Judge, held that: (1) defendant had received Disclosed
nonpublic information from source within acquiring
349Bk60.28(12) k. Inside or
corporation, as to impending merger, even though thereNonpublic Market Information. Most Cited Cases
had been rumors regarding merger and an article
concerning merger prospects in financial journal; (2)
To constitute nonpublic information, upon which
information was material, despite defendant's claim that insider trading claim can be brought under Rule 10b-5,
at time he traded probability of merger was not great information in question must be specific and more
and magnitude of event if it occurred was notprivate than general rumor. Securities Exchange Act of
significant; (3) circumstantial evidence indicated that 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R.
defendant knew information had been imparted in 240.10b-5.
violation of fiduciary duty owed by tipper by virtue of
tipper's position as corporate officer; and (4) evidence
60.29
supported determination that defendant had obstructed [3] Securities Regulation 349B
justice through commission of perjury.
349B Securities Regulation
349BI Federal Regulation
Affirmed.
349BI(C) Trading and Markets
349BI(C)7 Fraud and Manipulation
Meskill, Circuit Judge, concurred in part and
349Bk60.17 Manipulative, Deceptive or
dissented in part and filed opinion.
Fraudulent Conduct
349Bk60.29 k. Release of Inside or
West Headnotes
Nonpublic Market Information; Tipping. Most Cited
Cases
[1] Securities Regulation 349B
60.28(2.1)
Officer of acquiring corporation (tipper) imparted
nonpublic information to friend (tippee) when he stated
349B Securities Regulation
his belief that acquiring corporation would buy target
349BI Federal Regulation
corporation, even though there were rumors of
349BI(C) Trading and Markets
impending acquisition and an article about acquisition
349BI(C)7 Fraud and Manipulation
349Bk60.17 Manipulative, Deceptive orprospects in financial journal; tipper's information was
substantially more specific than rumor, as tipper also
Fraudulent Conduct
349Bk60.28 Nondisclosure; Insiderstated that he had been asked to conduct study
regarding feasibility of integrating acquiring
Trading
349Bk60.28(2) Duty to Disclose orcorporation's work force with that of unidentified
corporation having same vital statistics as target, and
Refrain from Trading
349Bk60.28(2.1) k. In General.that his supervisor had asked him not to comment on
financial journal article. Securities Exchange Act of
Most Cited Cases

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(Cite as: 97 F.3d 663)
1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. [6] Securities Regulation 349B
60.28(2.1)
240.10b-5.
349B Securities Regulation
[4] Securities Regulation 349B
60.28(11)
349BI Federal Regulation
349BI(C) Trading and Markets
349BI(C)7 Fraud and Manipulation
349B Securities Regulation
349Bk60.17 Manipulative, Deceptive or
349BI Federal Regulation
Fraudulent Conduct
349BI(C) Trading and Markets
349Bk60.28 Nondisclosure; Insider
349BI(C)7 Fraud and Manipulation
349Bk60.17 Manipulative, Deceptive orTrading
349Bk60.28(2) Duty to Disclose or
Fraudulent Conduct
349Bk60.28 Nondisclosure; InsiderRefrain from Trading
349Bk60.28(2.1) k. In General.
Trading
Most
Cited
Cases
349Bk60.28(10) Matters to Be
Disclosed
349Bk60.28(11) k. Materiality.
For purposes of insider trading liability under Rule
Most Cited Cases
10b-5, misappropriation of information occurs when
person acquires material nonpublic information in
When an event is contingent and speculative, the breach of fiduciary duty or similar relationship of trust
materiality of information regarding that event, for and confidence and uses that information in securities
purposes of insider trading liability under Rule 10-5, transaction. Securities Exchange Act of 1934, 10(b),
depends upon balancing of both indicated probability15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b-5.
that event will occur and anticipated magnitude of event
in light of totality of issuing corporation's activity. [7] Securities Regulation 349B
60.29
Securities Exchange Act of 1934, 10(b), 15 U.S.C.A.
78j(b); 17 C.F.R. 240.10b-5.
349B Securities Regulation
349BI Federal Regulation
[5] Securities Regulation 349B
60.29
349BI(C) Trading and Markets
349BI(C)7 Fraud and Manipulation
349Bk60.17 Manipulative, Deceptive or
349B Securities Regulation
Fraudulent
Conduct
349BI Federal Regulation
349Bk60.29 k. Release of Inside or
349BI(C) Trading and Markets
Nonpublic Market Information; Tipping. Most Cited
349BI(C)7 Fraud and Manipulation
349Bk60.17 Manipulative, Deceptive orCases
Fraudulent Conduct
349Bk60.29 k. Release of Inside or
Tipper, who was officer of acquiring corporation,
Nonpublic Market Information; Tipping. Most Citedhad acquired insider information that acquisition of
Cases
target was imminent, and his imparting of that
information to tippee constituted misappropriation for
Information imparted to tippee regardingpurposes of insider trading violation under Rule 10b-5,
impending acquisition was material, for purposes of even though it was claimed that tipper concluded
insider trading liability under Rule 10b-5, even though through his own ingenuity that acquisition would take
tippee claimed that probability of acquisition was low at place, that he never was told about acquisition, and had
time he received information and that magnitude ofdone no more than piece together evidence obtained
acquisition was insufficient to make disclosure while working for acquiring corporation as an officer.
material; at time of disclosure acquiring corporation Securities Exchange Act of 1934, 10(b), 15 U.S.C.A.
had engaged outside counsel, investment bank and 78j(b); 17 C.F.R. 240.10b-5.
accountants, had formulated employee integration plan
and was preparing to submit bid for target, and[8] Securities Regulation 349B
60.45(1)
magnitude was great, as there was outlay of six billion
dollars and price of target's stock made sharp jump 349B Securities Regulation
after acquisition was publicly announced. Securities
349BI Federal Regulation
Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b);
349BI(C) Trading and Markets
17 C.F.R. 240.10b-5.
349BI(C)7 Fraud and Manipulation
349Bk60.43 Grounds of and Defenses to

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Liability

350HIV(C)2 Factors Increasing Offense


349Bk60.45 Scienter, Intent,Level
Knowledge, Negligence or Recklessness
350Hk761 k. Obstruction of Justice. Most
349Bk60.45(1) k. In General. MostCited Cases
Cited Cases
(Formerly 110k1253)
Scienter requirement for insider trading liability
Enhancement of sentence for obstruction of justice
under Rule 10b-5 was satisfied when tippee receivedthrough commission of perjury is mandatory once
information from tipper that acquiring corporation wasfactual predicates for perjury have been established.
about to merge with target corporation; as tippee knew
that tipper was a vice president of acquiring[12] Sentencing and Punishment 350H
761
corporation, there was circumstantial evidence tending
to show that tippee knew that tipper was disclosing
350H Sentencing and Punishment
information in breach of fiduciary duty. Securities
350HIV Sentencing Guidelines
Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b);
350HIV(C) Adjustments
17 C.F.R. 240.10b-5.
350HIV(C)2 Factors Increasing Offense
Level
[9] Sentencing and Punishment 350H
761
350Hk761 k. Obstruction of Justice. Most
Cited Cases
350H Sentencing and Punishment
(Formerly 110k1253)
350HIV Sentencing Guidelines
350HIV(C) Adjustments
Trial court could enhance defendant's sentence, for
350HIV(C)2 Factors Increasing Offenseinsider trading in violation of Rule 10b-5, due to
Level
obstruction of justice by commission of perjury; court's
350Hk761 k. Obstruction of Justice. Mostdetermination that defendant had lied to cover up fact
Cited Cases
he had traded on inside information was supported by
(Formerly 110k1253)
uncontested findings of false testimony, such as claim
that one set of trades was inspired by television show he
Sentence enhancement for obstruction of justicehad watched at lunch time while record showed that
through perjury is warranted when defendant testifyingtrades had begun early that morning, and lies were
under oath gives false testimony concerning material material, since if they had been credited, it would have
matter with willful intent to provide false testimony.
provided alternative explanation for defendant's trades,
casting doubts on whether he knowingly acted on
insider information.
[10] Sentencing and Punishment 350H
761
*665 Karen Patton Seymour, Asst. U.S. Atty., New
350H Sentencing and Punishment
York City (Mary Jo White, U.S. Atty., Michael
350HIV Sentencing Guidelines
Gertzman, Marian W. Payson, Asst. U.S. Attys., on the
350HIV(C) Adjustments
350HIV(C)2 Factors Increasing Offensebrief), for Appellee.
Level
350Hk761 k. Obstruction of Justice. MostAnthony DiSarro Winston & Strawn, New York City
(Daniel K. Webb, Matthias A. Lydon, on the brief), for
Cited Cases
Defendant-Appellant.
(Formerly 110k1253)
In determining whether to enhance sentence due to Before: MESKILL, CALABRESI, and PARKER,
obstruction of justice by perjury, any ambiguityCircuit Judges.
regarding testimony must be evaluated in light most
favorable to defendant.
CALABRESI, Circuit Judge:
Joseph Cusimano appeals from a final judgment
and sentence entered on May 16, 1996, in the United
[11] Sentencing and Punishment 350H
761
States District Court for the Southern District of New
York following his conviction for trading in violation of
350H Sentencing and Punishment
Rule 10b-5 of the Securities Exchange Act of 1934. 15
350HIV Sentencing Guidelines
U.S.C. 78n(e); 17 C.F.R. 240.10b-5 (1988).
350HIV(C) Adjustments

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Cusimano contends that there was insufficient evidence
to support a finding of insider trading, and that the
II. DISCUSSION
district court erred as a matter of law in finding that he A. Insider Trading
committed perjury. We reject both contentions and
[1] Cusimano's first contention is that the district
affirm the district court.
court erred in finding that his trades on November 9 and
November 12 constituted insider trading. Under the
I. BACKGROUND
misappropriation theory of Rule 10b-5, insider trading
On November 8, 1990, The Wall Street Journaloccurs whenever a person trades while in knowing
stated in an article that, according to unnamed sources, possession of misappropriated and material non-public
AT & T and NCR Corporation were discussing ways to information. See United States v. Chestman, 947 F.2d
integrate their businesses. The article indicated that the551, 566, 570 (2d Cir.1991), cert. denied, 503 U.S.
form that this combination might take was unclear, but 1004, 112 S.Ct. 1759, 118 L.Ed.2d 422 (1992).
it gave an acquisition of NCR by AT & T, and a spinoff Cusimano maintains that the district court erred in
of AT & T's computer business to NCR, as possible finding (1) that the information was non-public; (2) that
examples. The article also noted that the Journal 'sthe information was material; (3) that the information
sources had cautioned that the talks between the two was misappropriated; and (4) that he acted with
companies might well come to nothing, since AT & T scienter.
had repeatedly shown interest in acquiring various
computer makers over the past years to no effect.
1. Non-public Nature of the Information
[2][3] The district court did not err in its holding
*666 On the same day, Charles Brumfield, a Vice that the information imparted by Brumfield to
President of Labor Relations at AT & T, called his Cusimano was non-public. To constitute non-public
friend Joseph Cusimano. Brumfield had come to believe information under the act, information must be specific
that AT & T was going to acquire NCR based on and more private than general rumor. See SEC v.
information he obtained through the course of hisMonarch Fund, 608 F.2d 938, 942-43 (2d Cir.1979).
employment. (Brumfield had conducted a feasibilityWhile the district court acknowledged that papers such
study relating to the merger of AT & T with an unnamedas The Wall Street Journal had speculated, on or before
company that had the same vital statistics as NCR. November 8, 1990, that AT & T might acquire NCR, it
Moreover, Brumfield's supervisor, William Ketchum, also noted that Brumfield imparted information that
had brought the Journal article to his attention thatwas substantially more specific than that in the
morning and, although he did not usually give such newspaper. The court pointed out that while the
warnings, had expressly cautioned Brumfield not to newspaper reports listed an attempted acquisition as one
discuss it.) Brumfield therefore told Cusimano that he possibility among many, Brumfield's statement to
believed that the contents of the newspaper article were Cusimano that AT & T was going to attempt to acquire
true, and that AT & T was going to be attempting to NCR was both more specific and more certain than
acquire NCR. Cusimano thereafter made a series of any reports in the press.
trades in NCR securities on November 9, November 12,
and November 15-20, 1990. AT & T did not publicly
The defendant contends that Brumfield's
announce its friendly offer to acquire NCR until conclusion that an acquisition would occur was not
December 2, 1990. On December 3, 1990, the stock of supported by the non-public facts at his disposal. These
NCR increased $24.75 per share to a closing price of facts, he argues, could just as easily have supported
$81.50 per share.
other conclusions, including the one that nothing
would happen. We disagree. Brumfield's conclusion
On August 18, 1995, Cusimano pleaded guilty to was supported, for example, by the non-public facts (1)
insider trading for the purchases he made between that he had been asked to do a study of the feasibility of
November 15-20, but not for the trades he had made on integrating AT & T's workforce with that of a computer
November 9 and November 12. On October 20, 1995, company with the same vital statistics as NCR, and (2)
the district court issued an opinion and order holding, that Ketchum warned Brumfield not to speculate with
inter alia, that the November 9 and November 12 trades others about a press report that discussed the possibility
should be included in calculating Cusimano's offense that AT & T and NCR might combine (and Ketchum
and fine level and that Cusimano's sentence should be was not wont to give Brumfield such warnings). At the
further enhanced for perjury. Cusimano appeals. Since very least, these non-public facts would make a
his appeal turns on factual findings, we review for clear reasonable investor less likely to believe that nothing
error. See United States v. Rivera, 971 F.2d 876, 892 (2d would happen. *667 That by itself would be
Cir.1992) (citation omitted).
information with significant market value. Moreover,
the facts might well have pointed more specifically

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toward an acquisition than did the general newspaper the magnitude of the event was not high. He does not
article to a Vice President of the company, who would show, however, why a $6 billion acquisition should not
know how to place them in their proper context. Cf. be considered an event of great magnitude. He contends
Monarch Fund, 608 F.2d at 941 (Because of theirinstead that magnitude depends not only on the size of
positions, insiders know when they have the kind of the deal but also on whether the market has already
knowledge that is likely to affect the value of stock.) internalized the information with respect to the merger
(citations omitted).
at the time of the trade. But even under this measure,
the sharp jump in NCR's stock price after a formal
We do not today hold that any predictions made byacquisition announcement was made suffices to support
an insider can constitute the basis for insider trading a finding that the event in this case was one of major
simply because a tippee relies upon them and their magnitude.
source, and they subsequently come true. It may well be
that insider trading has not occurred, for example, in 3. Misappropriation
situations in which an insider has made categorical
[6] The district court correctly found that Cusimano
statements that are completely without foundation and misappropriated information. Under Rule 10b-5,
these are used successfully by a trader. We need go misappropriation occurs when a person acquires
nowhere near such an extreme holding, for here the material non-public information in breach of a
statement made by the insider was qualified, supported, fiduciary duty or similar relationship of trust and
and credible. Brumfield did not state that AT & T wouldconfidence and uses that information in a securities
acquire NCR. He had no real basis for such a statement. transaction. Chestman, 947 F.2d at 566. As shown
He did say, on the basis of nonpublic data, that he above, the information in this case was both non-public
believed that what he read in the paper was true, and and material. Therefore, the only additional showing
that AT & T was going to be attempting to acquireneeded to establish misappropriation is that the
NCR. He had private information that would supportinformation was acquired through a breach of a
both of these remarks, and both of them were of great relationship of trust and confidence.
value to a would-be trader.
[7] Cusimano acquired his information precisely in
2. Materiality
this way for he knew that his source, Brumfield, held a
[4] The trial court did not err in finding that theposition of trust and confidence in AT & T. Defendant
information imparted by Brumfield was material. When nevertheless
contends
that
there
was
no
an event is contingent and speculative, the materiality misappropriation because Brumfield concluded through
of information regarding that event depends upon a his own ingenuity that AT & T *668 would acquire
balancing of both the indicated probability that the NCR. He was never told about the acquisition and did
event will occur and the anticipated magnitude of the no more than piece together evidence obtained while
event in light of the totality of the company activity.working for AT & T. In SEC v. Materia, 745 F.2d 197,
Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct.201 (2d Cir.1984), cert. denied, 471 U.S. 1053, 105
978, 987, 99 L.Ed.2d 194 (1988) (citation and internalS.Ct. 2112, 85 L.Ed.2d 477 (1985), however, we upheld
quotation marks omitted). The district court held that a trial court's finding of misappropriation where the
Brumfield conveyed information that indicated a much defendant traded on information that he pieced together
higher level of probability than was publicly available through the course of his employment. The defendant's
concerning an event of great magnitude in the corporate objection therefore must fail.
life of NCR.
4. Scienter
[5] The defendant maintains that the district court
[8] Finally, the district court did not err in finding
was wrong about both the probability and the that Cusimano acted with scienter. Rule 10b-5 requires
magnitude of the event. He claims that the probability that the defendant subjectively believe that the
of the merger before November 8 was low becauseinformation received was obtained in breach of a
there is no evidence that, prior to November 12, seniorfiduciary duty. See Chestman, 947 F.2d at 570. Such
management of AT & T was in favor of an acquisition belief may, however, be shown by circumstantial
of NCR. This is belied by the record. Prior to evidence. Herman & MacLean v. Huddleston, 459 U.S.
November 12, AT & T had hired an investment bank, 375, 390-91 n. 30, 103 S.Ct. 683, 691-92 n. 30, 74
outside counsel, and accountants to formulate an L.Ed.2d 548 (1983). Cusimano knew that he had
acquisition plan; AT & T management had conducted obtained information from Brumfield. He argues that
integration plans for an acquisition; and AT & T this does not show scienter because nothing about
management teams were conducting discussionsBrumfield's position as a labor negotiator would
relating to an NCR bid. The defendant also avers that logically give rise to the inference that he was

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disclosing inside information. Because Cusimano knewbreach of a fiduciary duty or similar relationship of trust
that Brumfield was a Vice President of AT & T, this and confidence and uses that information in a securities
contention is meritless.
transaction. United States v. Teicher, 987 F.2d 112, 119
(2d Cir.1993) (quoting United States v. Chestman, 947
F.2d 551, 556 (2d Cir.) (in banc), cert. denied, 503 U.S.
B. Obstruction of Justice Through Perjury
[9][10][11][12] The defendant also appeals the trial 1004, 112 S.Ct. 1759, 118 L.Ed.2d 422 (1992)), cert.
court's sentencing enhancement for obstruction of *669 denied, 510 U.S. 976, 114 S.Ct. 467, 126 L.Ed.2d
justice through perjury. A sentence enhancement for 419 (1993). Persons who trade while in knowing
perjury is warranted when a defendant testifying under possession of such information similarly violate Rule
oath gives false testimony concerning a material matter 10b-5.
with the willful intent to provide false testimony....
United States v. Cawley, 48 F.3d 90, 94 (2d Cir.1995)
It follows that if none of the information that is
(citation and internal quotation marks omitted). Anyallegedly inside information meets all of the elements
ambiguity regarding the testimony must be evaluated in (namely, material and nonpublic), there can be no
the light most favorable to the defendant. See United violation. The flaw in the majority's reasoning on the
States v. Cunavelis, 969 F.2d 1419, 1423 (2d Cir.1992).November 9 and 12 trades, is its attribution of
But such an enhancement is mandatory once its factual materiality to Brumfield's predictions that were based
predicates have been established. United States v. on false or thoroughly inconclusive information. Thus, I
Friedman, 998 F.2d 53, 58 (2d Cir.1993). The trial courtbelieve, that even though some of the information
found that Cusimano lied in order to cover up the fact relayed by Brumfield to Cusimano was material, and
that he traded on inside information. This determination some was non-public, none was both. Therefore, I
is supported by uncontested findings, such as the fact respectfully dissent as to those trades.
that Cusimano stated that his November 12 trades were
inspired by a TV show that he watched at lunchtime,
The majority's first theory is that Brumfield added
while the record shows that his trades began early that to the information already available in the Wall Street
morning. Defendant contends that even if he lied, those Journal. However, the extra information-that the
lies did not concern a material matter. That contention is transaction definitely was going to happen and that it
without merit. If Cusimano's false testimony had been was going to be an acquisition-did not exist at the time
credited, it would have provided an alternativeBrumfield tipped Cusimano. In other words, Brumfield
explanation for his trades. This in turn would have cast could not state correctly that the acquisition attempt was
doubt on whether he knowingly acted on inside going to happen at all, because according to Blaine
information, which is a required element of insiderDavis, the head of AT & T's Strategic Development
trading. Defendant's lies thus were clearly material.
group, the only government witness on this event, AT &
T had not yet made that decision. The exploratory steps
III. CONCLUSION
taken by AT & T prior to deciding whether to make a
Because Cusimano traded on November 9 and 12 bid for NCR were just that, exploratory business
while in knowing possession of misappropriated and inquiries before making an important business decision.
material non-public information, the district court
correctly found that he engaged in insider trading on
The majority says: We do not today hold that any
those two dates. Moreover, because Cusimano willfullypredictions made by an insider can constitute the basis
gave false testimony about a material matter under oath, for insider trading simply because a tippee relies upon
the court did not err in enhancing his sentence for them and their source, and they subsequently come
obstruction of justice through perjury.
true. I fear that, by implication, they may have done
just that.
We affirm the judgment of the district court.
I would vacate the judgment of conviction as to
MESKILL, Circuit Judge, concurring in part and Cusimano's sentence and remand for resentencing.
dissenting in part:
I concur in most of the majority's opinion.C.A.2 (N.Y.),1996.
However, I cannot agree that Cusimano's trades on U.S. v. Mylett
November 9 and 12 were criminal acts that should have97 F.3d 663, Fed. Sec. L. Rep. P 99,326
been included in calculating his offense and fine level.
A person violates Rule 10b-5 when he or she
misappropriates material nonpublic information in

END OF DOCUMENT

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