In The Courts

According to the Indictment, Cassese was the Chairman and President of Computer Horizons Corporation, a publicly traded company. Cassese met with a senior manager of Compuware Corporation to discuss a potential acquisition of Computer Horizons by Compuware. While the negotiations between Compuware and Computer Horizons were ongoing, representatives from Compuware met with executives from Data Processing Resources Corporation (DPRC) to discuss a potential merger of those companies. Compuware's Chief Executive Officer, Peter Karmanos, then telephoned Cassese and advised him that Compuware would not acquire Computer Horizons, but would acquire DPRC instead. The day after receiving the information, Cassese purchased 15,000 shares of DPRC. After the merger was announced, Cassese sold the stock, yielding $150,937.50 in profit.

In evaluating Cassese's motion to dismiss, the court examined the two general theories of liability under Section 10(b) and Rule 10b-5: traditional insider trading and misappropriation. The indictment failed to allege the necessary elements for traditional inside trading – namely that Cassese was a corporate insider of DPRC or that Karmanos breached his fiduciary duty to Compuware – so the only possible legal theory for the Section 10(b) charge was misappropriation.

Under a misappropriation theory, a person commits fraud “in connection with” a securities transaction, in violation of ' 10(b), “when he misappropriates confidential information for securities trading purposes, in breach of duty owed to the source of the information.” United States v. O'Hagen, 521 U.S. 642, 652 (1997). Thus, misappropriation liability rests on the existence of “a fiduciary duty or similar relationship of trust and confidence” owed to the source of the material, nonpublic information. United States v. Chestman, 947 F.2d 551, 566 (2d Cir. 1991).

The court held that the Indictment failed to allege that Cassese had a fiduciary relationship with Karmanos to satisfy the elements of a Rule 10b-5 violation under a misappropriation theory. The Indictment stated that Cassese and Karmanos were competitors engaged in negotiations for a possible business combination involving their respective companies. Cassese and Karmanos were not fiduciaries, but rather potential arms-length business partners. Furthermore, the indictment failed to allege that Cassese and Jarmanos had a long-standing relationship or that they regularly shared confidences. Thus, the court granted Cassese's motion to dismiss Count Two of the Indictment.

Court Dismisses Rule 10b-5 Count of Indictment

Southern District of New York Dismisses Rule 10b-5 Count of Indictment Because the Relationship Between the Defendant and the Tipper Did Not Give Rise to Misappropriation Liability.

In United States v. Cassese, No. 03 CR. 302 (RWS), 2003 WL 21710765, (S.D.N.Y. July 23, 2003), Defendant John J. Cassese was indicted for two counts of securities fraud. Cassese moved to dismiss Count Two of the Indictment as legally insufficient. Count Two charged Cassese with securities fraud, in violation of 15 U.S.C. '' 78j(b) and 78ff, 17 C.F.R. '240.10b-5 and 18 U.S.C. ' 2.

According to the Indictment, Cassese was the Chairman and President of Computer Horizons Corporation, a publicly traded company. Cassese met with a senior manager of Compuware Corporation to discuss a potential acquisition of Computer Horizons by Compuware. While the negotiations between Compuware and Computer Horizons were ongoing, representatives from Compuware met with executives from Data Processing Resources Corporation (DPRC) to discuss a potential merger of those companies. Compuware's Chief Executive Officer, Peter Karmanos, then telephoned Cassese and advised him that Compuware would not acquire Computer Horizons, but would acquire DPRC instead. The day after receiving the information, Cassese purchased 15,000 shares of DPRC. After the merger was announced, Cassese sold the stock, yielding $150,937.50 in profit.

In evaluating Cassese's motion to dismiss, the court examined the two general theories of liability under Section 10(b) and Rule 10b-5: traditional insider trading and misappropriation. The indictment failed to allege the necessary elements for traditional inside trading – namely that Cassese was a corporate insider of DPRC or that Karmanos breached his fiduciary duty to Compuware – so the only possible legal theory for the Section 10(b) charge was misappropriation.

Under a misappropriation theory, a person commits fraud “in connection with” a securities transaction, in violation of ' 10(b), “when he misappropriates confidential information for securities trading purposes, in breach of duty owed to the source of the information.” United States v. O'Hagen , 521 U.S. 642, 652 (1997). Thus, misappropriation liability rests on the existence of “a fiduciary duty or similar relationship of trust and confidence” owed to the source of the material, nonpublic information. United States v. Chestman , 947 F.2d 551, 566 (2d Cir. 1991).

The court held that the Indictment failed to allege that Cassese had a fiduciary relationship with Karmanos to satisfy the elements of a Rule 10b-5 violation under a misappropriation theory. The Indictment stated that Cassese and Karmanos were competitors engaged in negotiations for a possible business combination involving their respective companies. Cassese and Karmanos were not fiduciaries, but rather potential arms-length business partners. Furthermore, the indictment failed to allege that Cassese and Jarmanos had a long-standing relationship or that they regularly shared confidences. Thus, the court granted Cassese's motion to dismiss Count Two of the Indictment.