Opinion
17 Civ. 2088 (RMB)
2019-07-29
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Amir WALDMAN, et al., Defendants.
James Albert Scoggins, II, Pro Hac Vice, Terry Ryan Miller, Pro Hac Vice, Stephen C. McKenna, U.S. Securities and Exchange Commission, Denver, CO, for Plaintiff. Christopher Lloyd LaVigne, Stephen Robert Fishbein, Benjamin Klebanoff, Shearman & Sterling LLP (NY), New York, NY, Zvi Daniel Gabbay, Barnea Jaffa Lande & Co Law Offices, for Defendant.
James Albert Scoggins, II, Pro Hac Vice, Terry Ryan Miller, Pro Hac Vice, Stephen C. McKenna, U.S. Securities and Exchange Commission, Denver, CO, for Plaintiff.
Christopher Lloyd LaVigne, Stephen Robert Fishbein, Benjamin Klebanoff, Shearman & Sterling LLP (NY), New York, NY, Zvi Daniel Gabbay, Barnea Jaffa Lande & Co Law Offices, for Defendant.
DECISION & ORDER
RICHARD M. BERMAN, U.S.D.J
I. Background
This Decision & Order resolves the summary judgment motion, dated December 10, 2018, of Defendants Amir Waldman ("Waldman") and Roger Shaoul ("Shaoul," and collectively with Waldman, "Defendants") against the Securities and Exchange Commission ("SEC" or "Plaintiff"). The SEC alleged in an amended complaint, dated November 28, 2017, that in February and March of 2017 Defendants traded securities of Mobileye, N.V. ("Mobileye") based upon inside information, in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 ; and Section 14(e) of the Exchange Act, 15 U.S.C. § 78n(e), and Rule 14e-3(a), 17 C.F.R. § 240.14e-3(a). First Amended Complaint, dated Nov. 28, 2017, ¶¶ 16, 26, 38, 62, 64, 79, 82.
Mobileye is an Israeli company which develops "autonomous driving software and technology" and was founded in 1999 by Ziv Aviram and Amnon Shashua ("Mobileye Founders"). Defs.' Rule 56.1 Statement of Material Facts, dated December 10, 2018 ("Def. 56.1") ¶¶ 21-23. Mobileye became a public company in July 2014. Id. ¶ 38. In November 2016, Mobileye learned that the Intel Corporation was interested in acquiring Mobileye, and on January 27, 2017, the Mobileye Founders met with principals of Intel in New York "to discuss the possibility of Intel acquiring Mobileye." Id. ¶¶ 59-60; SEC's Rule 56.1 Statement of Additional Facts, dated February 19, 2019 ("SEC 56.1") ¶¶ 3, 57.
On March 13, 2017, Mobileye and Intel executed an agreement "under which Intel would buy Mobileye for approximately $15.3 billion, or $63.54 per share," ("Tender Offer"). Def. 56.1 ¶ 64. The purchase price of $63.54 per share of common stock was "a 34.4% premium" over the closing price for Mobileye shares on the prior trading day, which was March 10, 2017. Id. ¶ 4.
In its Amended Complaint, the SEC alleges that Waldman and Shaoul received material nonpublic inside information ("Inside Information") about Intel's acquisition of Mobileye when James Shaoul tipped his brother Roger and good trading friend Waldman. Amended Complaint ¶ 44. According to the SEC, James Shaoul is "friends with two Mobileye insiders with early knowledge of the [Intel] deal and [was] in contact with them" during the time that Mobileye and Intel were negotiating an acquisition. SEC's Mem. of Law in Opp'n to Def.'s Mot. for Summ. J., dated Jan. 9, 2019 ("SEC Opp'n") at 25.
Waldman
The Amended Complaint alleges that Waldman made unusual and suspicious purchases of "risky Mobileye securities" through "remarkably timed and profitable" transactions, based upon information which James Shaoul told him concerning Mobileye's negotiations with Intel. Amended Complaint ¶ 1. Waldman has a doctorate in chemical physics from Hebrew University, Def. 56.1 ¶ 1, and "[t]hough not a professional or full-time trader," Waldman "has traded securities for decades." Id. ¶ 9.
Waldman was a "good friend" of James Shaoul and "typically saw or spoke to James Shaoul weekly or every other week from 2014 to March 2017." Def. 56.1 ¶ 11. From 2014 to 2017, Waldman and James Shaoul discussed "investment opportunities with one another, including Mobileye." Id. ¶ 12. And, they discussed "Mobileye's management, leadership, and activities relating to the autonomous driving sector," Id. ¶ 13.
Waldman began trading in Mobileye securities in 2014. Def. 56.1 ¶ 43. In addition to trades of Mobileye common stock, Waldman also traded Mobileye options, which enabled him to profit from anticipated changes in Mobileye's share price. Waldman purchased options "based on his expectations associated with upcoming earnings announcements or events." Id. ¶ 45. Prior to February 1, 2017, "Waldman's greatest monthly investment in [Mobileye] options was $85,000." SEC 56.1 ¶ 52.
Waldman acknowledges that he learned from James Shaoul in February or March of 2017 that "the Mobileye founders were travelling to the United States for th[e] deal [i.e., presumably, the merger or the purchase of Mobileye by Intel on March 13, 2017]." SEC 56.1 ¶ 35. And, Waldman understood from his conversations with James Shaoul that "the fact that they travelled together to me was a sign that something big was going on behind the scene." SEC's Response to Defs.' Rule 56.1 Statement of Material Facts, dated Jan. 9, 2019 ("SEC 56.1 Response") ¶ 14.
On January 30, 2017, i.e., the Monday after the January 27, 2017 meeting between Mobileye and Intel's principals, Waldman "made a large deposit" to his options account. SEC 56.1 ¶ 57. He began a series of purchases of Mobileye common stock and options on February 1, 2017, which was the same day that Mobileye and Intel signed a non-disclosure agreement with respect to Intel's acquisition of Mobileye. Id. ¶ 5. From February 1, 2017 through early March of 2017, Waldman also purchased Mobileye calls, which are a type of option security which enabled Waldman to profit if Mobileye's share price went up. Def. 56.1 ¶¶ 88-89, 94-96.
Between February 1, 2017 and March 13, 2017, Waldman purchased Mobileye options worth approximately $400,000. Expert Rep. of Joseph Mason, dated February 14, 2018 ("Mason Rep."), Dkt. 195-16 at 21-22, 63. During the same period, Waldman also purchased Mobileye shares of common stock worth approximately $500,000. Id. at 21-22. In total, he invested nearly $900,000 in Mobileye securities, both options and common stock, during the period February 1, 2017 to March 13, 2017. SEC 56.1 ¶ 52.
On March 13, 2017, following the announcement that Intel would acquire Mobileye, Waldman sold Mobileye securities for a gain of approximately $7.1 million. SEC 56.1 ¶ 53. Waldman continued to hold some Mobileye options which he was unable to sell because the SEC obtained an asset freeze on his account. Mason Rep., Dkt. 195-16 ¶ 49 & n.29. His unsold Mobileye options represented unrecognized gains totaling approximately $3 million. Id.
Shaoul
The Amended Complaint alleges that Shaoul made "remarkably timed and profitable trad[es]" between February 1, 2017 and March 8, 2017, i.e., prior to the announcement on March 13, 2017 of Intel's acquisition of Mobileye. Amended Complaint ¶ 1. These purchases were "[b]ased solely on the advice of [his brother] James Shaoul," SEC Opp'n at 4. Shaoul owns a business in Richmond, Virginia, and he testified that he "is not a sophisticated trader." Def. 56.1 ¶¶ 15-16. In February and March of 2017, Shaoul withdrew approximately 95% of the money in his bank accounts and purchased approximately $214,000 of Mobileye options and shares. SEC 56.1 ¶¶ 38, 46-47. Shaoul purchased options that "closely resembled the options purchased by Waldman." SEC 56.1 ¶ 44. Shaoul testified that his brother James told him "exactly which options to purchase." Id. ¶ 45.
Shaoul did not purchase the Mobileye options and shares in a trading account of his own. Amended Complaint ¶¶ 54-59, 62. Instead, he first transferred his funds to a trading account that his "good friend and business partner," Lawrence Cluff, had opened on January 29, 2017. Id. And, Shaoul used the Cluff account to purchase Mobileye options and stocks in Cluff's name. SEC 56.1 ¶ 37. According to Cluff, Shaoul had stated that he was purchasing Mobileye securities because "[h]is family knew the principals. It was recommended by the owners of [Mobileye] that all their friends and family invest in this." Dkt. 195-21 at 66:12-15; Dkt. 204-9 at 153:18-154:6.
Between March 13, 2017 and March 23, 2017, following the announcement on March 13, 2017 that Intel would acquire Mobileye, Shaoul sold his Mobileye options and shares, which he had purchased for approximately $214,000, for more than $1.27 million. SEC 56.1 ¶¶ 46-48; Dkt. No. 204-15.
Asset Freeze Order
Several of the issues raised in Defendants' motion for summary judgment, including the circumstances surrounding Waldman's trading in Mobileye stock during the period February 1, 2017, to March 13, 2017, were discussed by the Court in connection with the SEC's successful application, dated March 23, 2017, for an asset freeze of Waldman's U.S. trading account. The SEC argued that "overwhelming circumstantial evidence confirms that Waldman traded on nonpublic information." Pl.'s Memorandum of Law in Support of Application for an Asset Freeze, dated Dec. 21, 2017, at 15. The SEC called particular attention to Waldman's acknowledgement, during a November 8, 2017 deposition, that "James Shaoul told him that James's friends, Mobileye insiders, were traveling from Israel to the United States in February and March of 2017 to negotiate the [Mobileye] Tender Offer." Id. at 1. Waldman opposed the asset freeze motion contending that the SEC is "unable to identify the substance of the alleged tip or tips, [or] when or how the tip or tips were communicated (either directly or indirectly)." Def.'s Memorandum of Law in Opp'n to Pl.'s Application for an Asset Freeze, dated Jan. 2, 2018, Dkt. 80, at 2.
On April 11, 2018, the Court held an Order to Show Cause Hearing to determine whether to freeze Waldman's assets. See Transcript, dated Apr. 11, 2018. Among other evidence, the Court heard testimony from the parties' respective expert witnesses, who reviewed Waldman's trading records prior to the hearing and submitted declarations to the Court with their conclusions about Waldman's Mobileye trades. The SEC's expert, Joseph Mason, concluded that Waldman was "targeting a material event to occur prior to March 17, 2017, in particular." Id. at 21. And, Waldman's own expert, Garrick Tsui, conceded that Waldman's February and March 2017 Mobileye option purchases "were significantly greater than at any time in the past." Id. at 53.
The announcement of the Intel Acquisition of Mobileye occurred on March 13, 2017.
On April 20, 2018, the Court issued an Order, which is on the docket of this action, Dkt. No. 121, granting the SEC's freeze application. The Court found, among other things, that the SEC "demonstrated a strong basis to infer that Waldman traded in securities of Mobileye ... between February 1, 2017, and March 13, 2017 [ ] based upon inside information." Order, dated Apr. 20, 2018, at 3. The Court also concluded that Waldman's trading records, "as credibly reviewed by [the SEC's expert]," supported the SEC's claim that Waldman "purchased risky securities of [Mobileye] in a month-long campaign consisting of highly suspicious and profitable trades that continued until the announcement, on March 13, 2017, that Intel Corporation [ ] agreed to acquire Mobileye by tender offer [ ]." Id. (quoting Amended Complaint ¶ 1). The Court also addressed Waldman's contention – which was raised after the Order to Show Cause hearing had concluded – that the SEC had relied upon a portion of Waldman's deposition transcript, dated November 8, 2017, which was improperly transcribed. That is, Waldman had contended belatedly that the portion of the transcript in which Waldman acknowledged that James Shaoul had told him that Mobileye insiders were traveling to the United States to negotiate the Tender Offer was incorrect. The Waldman Deposition transcript reads as follows: SEC: "Dr. Waldman, I'll represent to you that there has been testimony in this case that the Mobileye major founders, Ziv Aviram and Professor Amnon Shashua, travelled repeatedly to the United States in January and February of 2017 to discuss the very deal that culminated in the [Intel] merger or the purchase on March 13, 2017. Were you aware that the Mobileye founders were travelling to the United States for th[e] [Intel] deal? Waldman: "Yes...." SEC: "How were you aware of that?" Waldman: "I got this information from James [Shaoul]." Dkt 195, Ex. 1 ("Waldman Deposition") at 221-222. The Court stated that Waldman had never timely objected to this portion of the transcript "even though he clearly had the opportunity to do so," and that "[r]egardless, the Court has reviewed the video deposition and determined that notwithstanding Waldman's interpretation of the disputed question and answer there is clearly a basis to infer that Waldman was trading on inside information." Order, dated Apr. 20, 2018, at 6.
Summary Judgment Motion
On December 10, 2018, Defendants moved for summary judgment against the SEC, arguing that the SEC had failed to prove three necessary elements of insider trading, as follows: (1) "there is no evidence that Defendants ever knowingly possessed material nonpublic information," Defs.' Mem. of Law in Supp. Of Their Mot. for Summ. J., dated Dec. 10, 2018 ("Def. Mem."), at 16; (2) there is no evidence that Mobileye insiders "benefited from any [ ] tip" of Inside Information, id. at 25; and (3) the SEC has failed to develop any evidence that Defendants were aware or should have been aware that they had received information from James Shaoul which resulted from the breach of a fiduciary duty, id. at 28.
On January 9, 2019, the SEC responded, as follows: (1) "Defendants' admissions and suspicious, unexplained trades, coupled with James Shaoul's contacts with insiders, create an issue of fact that Defendants improperly [possessed and] used [inside] information about the Tender Offer," SEC Opp'n at 10 (emphasis omitted); (2) Mobileye insiders were friends of James Shaoul and the insiders benefited by "disclos[ing] to [James Shaoul] nonpublic information," id. at 26-27; and (3) Defendants "knew or consciously avoided knowing that they acquired tips as the result of a breach of duty," id. at 29.
On January 23, 2019, Defendants file a reply. Defs.' Mem. of Law in Reply to Pl.'s Opp'n to Defs.' Mot. for Summ. J., dated Jan. 23, 2019 ("Def. Reply").
For the reasons stated below, Defendants' motion for summary judgment is denied.
Any arguments or issues raised by the parties but not specifically addressed herein have been considered by the Court and rejected.
II. Legal Standard
Summary judgment is appropriate where the movant shows that there is no genuine dispute as to any material fact. Fed.R.Civ.P. 56(a). "Summary judgment is inappropriate when the admissible materials produced in opposition to the summary judgment motion ‘make it arguable’ that the claim has merit." In re Dana Corp., 574 F.3d 129, 151 (2d Cir. 2009) (citation omitted). "The function of the district court in considering the motion for summary judgment is not to resolve disputed questions of fact but only to determine whether, as to any material issue, a genuine factual dispute exists." Rogoz v. City of Hartford, 796 F.3d 236, 245 (2d Cir. 2015) (citation omitted). The Court should "draw all permissible factual inferences in favor of the party against whom summary judgment is sought." Johnson v. Killian, 680 F.3d 234, 236 (2d Cir. 2012).
"Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5 prohibit undisclosed trading on inside corporate information by individuals who are under a duty of trust and confidence." Salman v. United States, ––– U.S. ––––, 137 S. Ct. 420, 423, 196 L.Ed.2d 351 (2016). "In every insider trading case ... the unlawful actor must know or be reckless in not knowing that the conduct was deceptive." S.E.C. v. Obus, 693 F.3d 276, 286 (2d Cir. 2012). "[I]nsider trading liability [ ] reach[es] situations where the insider ... in possession of material nonpublic information (the ‘tipper’) does not himself trade but discloses the information to an outsider (a ‘tippee’) who then trades on the basis of the information before it is publicly disclosed." United States v. Newman, 773 F.3d 438, 446 (2d Cir. 2014). Insider trading liability may also apply to a "chain" of tippers and tippees. Obus, 693 F.3d at 288.
"[C]hains of tipping are not uncommon and follow the same basic analysis.... The first tippee must both know or have reason to know that the information was obtained and transmitted through a breach and intentionally or recklessly tip the information further for her own benefit. The final tippee must both know or have reason to know that the information was obtained through a breach and trade while in knowing possession of the information." Id.
III. Analysis
(1) There is a Triable Issue of Fact Whether Defendants Possessed Inside Information
Defendants argue that the SEC is "relying on speculation to establish" that Defendants "ever knowingly possessed [Inside Information]" because there is no evidence that Defendants "obtained [Inside Information] from James Shaoul" which James Shaoul "in turn ... obtained [ ] from" the Mobileye Founders. Def. Mem. at 17. Defendants point to the fact that the Mobileye Founders "testified unequivocally and compellingly that [they] never disclosed [Inside Information] to James Shaoul." Def. Mem. at 15-16 (emphasis omitted). And, Defendants argue that the SEC "is left with a case based on the defendants' successful trades," and "successful trade [can] not fill this void." Id. at 22 (emphasis omitted). The SEC responds that "Defendants' admissions and suspicious, unexplained trades, coupled with James Shaoul's contacts with insiders, create an issue of fact that Defendants improperly [possessed and] used information about the Tender Offer." SEC Opp'n at 10 (emphasis omitted).
"Circumstantial evidence is a legitimate form of evidence in this Circuit, and in fact-intensive cases such as this, requiring careful examination of trading records and a myriad of public information, the jury is the appropriate body to determine a defendant's guilt or innocence," See United States v. McDermott, 245 F.3d 133, 139 (2d Cir. 2001) ; see also Obus, 693 F.3d at 290 ("[W]e have never held that a tip needs to be established by direct evidence," and it "is often the case [that] there is no direct evidence."). The SEC has provided sufficient evidence, including (i) Defendants' testimony related to their conversations with James Shaoul about Mobileye; (ii) Defendants' attempts to conceal their Mobileye trading; and (iii) Defendants' high-risk and high-volume trading of Mobileye, to create a triable issue of fact over whether Defendants possessed Inside Information.
Defendants' Communications with James Shaoul
"[O]n summary judgment, the district court [is] required to credit the testimony relied on by the SEC and to draw all inferences in its favor." Obus, 693 F.3d at 290. The meaning and import of communications between an alleged tipper and tippee "is a matter for the jury to decide." SEC v. Payton, 155 F. Supp. 3d 428, 431 (S.D.N.Y. 2015).
The parties dispute whether James Shaoul told Waldman that the Mobileye Founders were traveling to the United States to negotiate the Intel Tender Offer. Waldman says that James Shaoul told Waldman only that the Mobileye Founders were traveling to the United States. Def. Mem. at 24. The Court draws, for purposes of summary judgment, the inference in favor of the SEC. See Hayes v. City of New York, 2014 WL 4626071, at *8 (S.D.N.Y. Sept. 15, 2014) ("[W]ell-established rules for the resolution of summary judgment motions prohibit the resolution of [ ] ambiguous testimony in favor of the non-movants."); see also Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009) (a court must "resolv[e] all ambiguities and draw[ ] all permissible factual inferences in favor of the party against whom summary judgment is sought"). Waldman argues on summary judgment that he "unequivocally denied ever knowing about th[e] [Intel] acquisition," that the SEC is relying on an incorrectly transcribed deposition, and that the video of the deposition confirms the error. Def. Mem. at 25. By contrast, the SEC contends that Waldman's testimony was properly transcribed and definitively establishes that he possessed Inside Information. SEC Opp'n at 14. The original transcript – which to the Court's knowledge has never been changed – states: SEC: "Dr. Waldman, I'll represent to you that there has been testimony in this case that the Mobileye major founders, Ziv Aviram and Professor Amnon Shashua, travelled repeatedly to the United States in January and February of 2017 to discuss the very deal that culminated in the [Intel] merger or the purchase on March 13, 2017. Were you aware that the Mobileye founders were travelling to the United States for that deal? Waldman: "Yes...." SEC: "How were you aware of that?" Waldman: "I got this information from James [Shaoul]." Waldman Deposition at 221-222. And, the SEC also correctly notes that "even if there were a valid change to the transcript ..., the original answers reported in a transcript remain part of the record that can be read at trial." SEC Opp'n at 14-15 (emphasis in original); see Podell v. Citicorp Diners Club, Inc., 112 F.3d 98, 103 (2d Cir. 1997) ("[A] deponent's original answer should be admitted into evidence even when he amends his deposition testimony.").
The SEC additionally and persuasively argues that even if Waldman's interpretation of his deposition testimony were correct, at the very least, Waldman offered contradictory testimony in his deposition creating an issue of fact for a jury to resolve. SEC Opp'n at 15; see Fate v. Charles, 24 F.Supp. 3d 337, 342 (S.D.N.Y. 2014) ("[W]hen [ ] material evidence essentially consists of contradictory testimony, summary judgment will not be appropriate."), It appears undisputed that Waldman believed that "something big [was] going on behind the scenes [with Mobileye]." SEC 56.1 ¶ 14.
Whether James Shaoul disclosed Inside Information about Mobileye to his brother Roger Shaoul is also an issue for a jury to resolve. See Payton, 155 F. Supp. 3d at 431 ; see also United States v. Rajaratnam, 802 F. Supp. 2d 491, 504 (S.D.N.Y. 2011) (where there was "evidence of timely trading following calls connecting an insider and tippees"). The parties do not dispute that James Shaoul and Roger Shaoul had a conversation about investing in Mobileye in the middle of January 2017; that during that conversation James recommended that Roger purchase Mobileye; and that Roger Shaoul thought about "this advice and hunch of my brother" and bought shares of – and profited from – Mobileye on February 1, 2017. SEC 56.1 Response ¶¶ 107, 109. Roger also testified that James told him which Mobileye options to purchase and coached him through a phone call with an options broker who had warned Roger that his trading strategy was unusual. SEC 56.1 ¶ 28.
Defendants Attempts to Conceal Their Trading Activity
A "[defendant's] resort to deceptive trading practices supports the inference that he was trading illegally on inside information." SEC v. Warde, 151 F.3d 42, 49 (2d Cir. 1998). Waldman admits that he concealed his trading in Mobileye from his financial advisor, Moshe Ruach ("Ruach"). SEC 56.1 ¶ 60-61. According to the SEC, Waldman's concealment is suspicious because Waldman normally would have had "a motive to tell Ruach about the [Mobileye] options [in order to] obtain [ ] advice about [the] risk and suitability of his position." SEC Opp'n at 8-9. The concealment from Ruach is made "even more suspicious because Ruach [ ] advised Waldman to use a ... strategy that was more conservative" than Waldman's. Id. Waldman did discuss his Mobileye investments with James Shaoul. SEC 56.1 ¶ 32.
And, Roger Shaoul concealed his Mobileye trading by using his friend Larry Cluff's OptionsXpress ("OX") trading account to make all of his Mobileye trades. SEC 56.1 ¶ 37. Larry Cluff testified that in January 2017 Roger "pestered" him to open the account, and that Roger "impersonated" Cluff in a phone call to OX on March 8, 2017. SEC 56.1 Response ¶ 111. These undisputed facts "support the inference that [Roger] illegally traded on inside information" and create a triable issue of fact. See Warde, 151 F.3d at 49
The Nature and Volume of Defendants' Trades
"[S]uspicious timing of trades ... and incredible reasons for such trades provide an adequate basis for inferring that tipping [of Inside Information] has occurred." S.E.C. v. Singer, 786 F. Supp. 1158, 1164 (S.D.N.Y. 1992). For example, "a sudden change in a defendant's stock trading pattern, which cannot be readily explained by other reasons, could be probative of trading on insider information." United States v. Goffer, 721 F.3d 113, 125 (2d Cir. 2013) ; see also S.E.C. v. Musella, 748 F. Supp. 1028, 1039 (S.D.N.Y. 1989) (finding the "amounts involved" in unusual trades suggest that a defendant's "confidence that these investments would ‘pan out’ quickly was unusually high, and thus suggestive of insider trading").
Waldman's and Roger Shaoul's "uncharacteristic, substantial and exceedingly risky investments" in Mobileye options support the inference that they possessed inside information. See Warde, 151 F.3d at 48. Before the February 1, 2017 to March 13, 2017 trading period, Waldman's "greatest monthly investment in options was $85,000." Mason Rep., Dkt. 195-16 at 21-22. During the trading period, Waldman purchased approximately $325,000 in Mobileye call options and approximately $500,000 in Mobileye common shares. Id. at 21-22 & 63. Prior to February 2017, the greatest number of times that Waldman traded options in a single month was 30. Id. at 16. By contrast, in February and March of 2017 Waldman made nearly 200 trades of options. Id. And, by March 10, 2017, the last trading day before the announcement of the Tender Offer, Waldman had approximately "ten times the exposure [to Mobileye] that he's ever had at any [ ] time prior." See Transcript, dated April 11, 2018, at 12:19-23. According to the SEC's expert, Waldman's purchases of out-of-the-money Mobileye option calls from February 1, 2017 through March 13, 2017 appear "highly irregular," Mason Rep., Dkt. 195-16 ¶ 6, and suggest he was targeting "something that is nonpublic that he expect[ed] to occur before March 17th." See Transcript, at 12:19-23, dated April 11, 2018. Waldman made approximately $7.1 million in profits from his Mobileye trading during the trading period, a figure that "has no precedent in his prior experience and nearly doubled his liquid assets." See SEC Opp'n at 8.
Waldman claims that in February and March of 2017, he was targeting two events he believed would occur: that (1) "Mobileye would enter into a deal with Volkswagen in early 2017," Def. Mem. at 23, and (2) would have a favorable earnings report on February 22, 2017, SEC 56.1 ¶ 62. The SEC persuasively argues that these events cannot explain Waldman's purchases because Mobileye announced a deal with Volkswagen on February 13, 2017, and its earnings call took place as scheduled on February 22, 2017. Id. ¶ 63; Def. Mem. at 10. Yet "Waldman did not liquidate his position after either event and, instead, accelerated his accumulation of shares and options" until March 6, 2017. SEC Opp'n at 8. This trading pattern was inconsistent with Waldman's trading history because in the past his "positions declined as the event[s] approached." See SEC 56.1 ¶ 55.
Roger Shaoul also engaged in trading activity that he admitted had "never happened" before. See SEC 56.1 ¶ 39. On January 30, 2017, Shaoul "virtually emptied his bank accounts and ... invested 95% of his liquid assets," i.e., $161,421.68, in Mobileye shares. Id. at 6. From March 2 to March 8, 2017, Roger purchased "a set of highly risky Mobileye options that closely resembled the options purchased by Waldman during the same week with expiration dates of March 17[, 2017]." Id. ¶ 44. In February 2017, Roger spent $161,422 buying Mobileye shares. Id. ¶ 46. In March 2017, Roger purchased $52,316.45 in Mobileye options. Id. ¶ 47. Ultimately, on March 13, 2017, after the Tender Offer was announced, Roger made $1,270,396.22 from his Mobileye trading. Id. ¶ 48. Roger Shaoul's unusual trading leads to the inference that the "the information [he] traded on was material [and] nonpublic." See SEC Opp'n at 10-11.
(2) There is a Triable Issue of Fact Whether Mobileye Insiders and/or James Shaoul Personally Benefitted from Inside Information
The parties dispute how close the relationship was between the Mobileye Founders and James Shaoul in connection with the "personal benefit" element of insider trading. Defendants argue that the relationship between the Founders and James Shaoul is neither indicative of a quid pro quo relationship, nor should it permit the inference that the Founders intended to benefit James Shaoul with some unknown, unspecified Inside Information. Def. Mem. at 27. The SEC responds that the relationship "was a meaningfully close relationship for purposes of a personal benefit." SEC Opp'n at 27. The SEC also argues that "[t]here was no legitimate reason for Mobileye insiders to disclose information about the Tender Offer to their trading friend other than to provide him with a benefit." Id.
"[T]he test for a personal benefit is whether objective evidence shows that ‘the insider personally will benefit, directly or indirectly, from his disclosure of confidential information to the tippee.’ " United States v. Martoma, 894 F.3d 64, 73 (2d Cir. 2017), cert. denied, ––– U.S. ––––, 139 S.Ct. 2665, 204 L.Ed.2d 1068 (2019). The "personal benefit element can [also] be met by evidence that the tipper's disclosure of inside information was intended to benefit the tippee." Id. at 76. The Court finds that it is "the province of the jury to evaluate competing narratives and decide what actually motivated a tipper to disclose confidential information, and consequently, whether there was a personal benefit to the insider on the facts of [this] [ ] case." Id. at 71 (emphasis added).
It should be left to a factfinder to decide whether the Mobileye Founders and James Shaoul were "close enough" such that the Founders intended to confer or receive a personal benefit. See Obus, 693 F.3d at 291 (where the tipper and tippee "were friends from college," the court found that fact was "sufficient to send to the jury the question of whether [the tipper] received a benefit from tipping [the tippee]"); S.E.C. v. Palermo, 2001 WL 1160612, at *7 (S.D.N.Y. Oct. 2, 2001) (where the defendant "admit[ed] that he and the [insiders that allegedly disclosed Insider Information to him] were friends," there was a triable issue of fact as to the "personal benefit element of insider trading"). The SEC points to evidence that "James owned equity in Mobileye when it was a private company and traveled with the Mobileye Founders to New York to celebrate Mobileye's public debut at the New York Stock Exchange in 2014"; James "invested in OrCam, a privately-owned company founded by [the Mobileye Founders]"; James's "family also has relationships with the families of the Mobileye Founders"; "James and his wife joined Mobileye on a private jet to Germany and Spain in early December 2016, soon after Intel expressed interest in Mobileye;" "Shashua's family attended a dinner James's home during the trading period;" and "Shaoul purchased the Shashua's car in November 2016." SEC Opp'n at 3.
Defendants concede that the Mobileye Founders and James Shaoul were in the same "social group that took motorcycle trips into the desert"; that they "interact[ed] ... [at] dinners ... at James Shaoul's home every few years"; and that they saw each other "in group social settings." Def. Mem. at 7, 27.
(3) There is a Triable Issue of Fact with Respect to Scienter
Defendants contend that "[t]he SEC has no evidence that the defendants had knowledge of a breach of fiduciary duty or acted with scienter." Def. Mem. at 27-28, The SEC responds that Defendants knew they had received information improperly because they could not have "reasonably believed that the tips came through legitimate channels." SEC Opp'n at 29. "[T]ippee liability can be established if a tippee knew or had reason to know that confidential information was initially obtained and transmitted improperly." Id. at 288. Determining whether a tippee acted with scienter is "is a fact-specific inquiry turning on the tippee's own knowledge and sophistication and on whether the tipper's conduct raised red flags that confidential information was being transmitted improperly." Id.
The evidence of Defendants' knowledge, intent, and conduct in connection with James Shaoul's alleged tip should be evaluated by a factfinder to determine whether Defendants knew or should have known that the tip was the result of the Mobileye insiders breaching their fiduciary duties. See, e.g., S.E.C. v. Sekhri, 2002 WL 31100823, at *13 (S.D.N.Y. July 22, 2002) (where a long-standing relationship between the tipper and tippee and the fact that the tipper "was in a position likely to have access to confidential information," supported the conclusion that the tippees knew the source of their inside information was breaching a fiduciary duty); SEC v. Musella, 678 F.Supp. 1060, 1063 (S.D.N.Y. 1988) (where the fact that the tippees "did not ask [about the source of information] because they did not want to know" required the inference that the tippees "should have known that fiduciary duties were being breached"); S.E.C. v. Musella, 578 F. Supp. 425, 442 (S.D.N.Y. 1984) (where the court found it "highly improbable" that a sophisticated market professional who "invest[ed] large sums of money on three occasions in various securities [did so] without ascertaining the source, reliability, and underlying circumstances of the tip received"). The SEC persuasively contends that "James's advice to Defendants came with red flags," including Waldman's testimony that James's tip led him to believe that "something big was going on behind the scenes [with Mobileye]," and Roger Shaoul's admission that prior to his brother James's recommendation to purchase Mobileye, James had "never before coached Roger to buy securities." SEC Opp'n at 29.
IV. Conclusion & Order
For the reasons stated herein, Defendants' summary judgment motion [#192] is denied.
A status conference is scheduled for Wednesday, September 11, 2019 at 12:00 p.m. at which time a trial date will be set.