SEC v. Rocklage

470 F.3d 1 (1st Cir. 2006)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

Rocklage (D) was the wife of Scott M. Rocklage who was the Chairman and CEO of Cubist Pharmaceuticals, Inc., a publicly traded biotechnology company. Rocklage (D) was not an employee of Cubist. Scott learned that one of the company's key drugs had failed its clinical trial. That afternoon, he phoned Rocklage (D) to discuss the trial results and he reached her while she was in a limousine. Scott made clear his intention that the results be kept confidential. He told her that she was not to react to what he was about to say, and he instructed her not to discuss the results in front of the limousine driver. She agreed. Scott had routinely communicated material, nonpublic information to his wife, and she had always kept the information confidential. Based on that prior agreement, and based on their prior history of sharing nonpublic information about the company and her keeping that information confidential, Scott had a reasonable expectation that she would not disclose the trial results to anyone. Scott informed his wife that the clinical trial had failed. Before the results were disclosed to her, Rocklage (D) understood her husband's expectation of confidentiality. Scott did not know that but his wife had a preexisting understanding with her brother that she would inform him with 'a wink and a nod' if she learned significant negative news about Cubist. Rocklage (D) knew or had reason to believe that her brother owned Cubist stock. She also knew or had reason to know her brother would trade in Cubist securities if she disclosed the nonpublic information to him. Rocklage (D) was informed that the stock price would drop significantly. Rocklage (D) spilled the beans. The P sued. P alleged that Rocklage (D) intentionally used deceptive means to obtain from her husband highly negative and non-public information about his publicly-traded company, in order to tip her brother who owned company stock, which then led to trading of the stock by her brother and another. Rocklage (D) initially concealed from her husband her prior agreement with her brother to tip him if she learned significant negative information about the company. She also concealed that she did not intend to maintain the confidentiality that her husband had reasonably understood to bind her. Ds avoided losses of about $230K total. Ds filed a Rule 12(b)(6) motion to dismiss for failure to state a claim. The court denied the motion. It explained that the Supreme Court has recognized two theories of insider trading liability: the 'classical theory' and the 'misappropriation theory.' The classical theory generally only imposes liability when a trader or tipper is an insider of the traded-in corporation. The classical insider-trader thus breaches a fiduciary duty owed to the corporation's shareholders. The misappropriation theory, however, creates liability when a tipper or trader misappropriates confidential information from his source of the information. The misappropriator thus breaches a fiduciary duty owed to the source. The district court found that the complaint stated facts sufficient to support a misappropriation theory of liability. It reasoned that the special nature of the marital relationship meant that her disclosure would never make its way to the shareholders; Scott’s loyalties lay first and foremost with his wife. This appeal resulted.