Here’s a bit of corporate common sense: If you sit on a board and you find out one of your company’s big investments is about to be acquired, don’t run out to buy a bunch of stock in the target company, and then flip it for a profit when the news breaks.
Unfortunately for J. Thomas Talbot, he’s being taught the hard way, courtesy of the Ninth Circuit (.pdf).
Talbot, an attorney, sat on Fidelity National Financial’s board (fun fact: Pellicano all-star teammate Terry Christensen also sat on that board). Fidelity held a 10 percent stake in LendingTree, which USA Interactive Corporation wanted to buy. Armed with this confidential information, Talbot bought 10,000 shares of LendingTree, on margin, from between $13.50 and $14.50 a share. After the companies announced the deal, LendingTree’s shares shot up 41 percent, and Talbot cleared about $68K.
The SEC, it didn’t like that none too much. Regulators brought an insider-trading action against Talbot, but Central District judge Margaret Morrow threw it out “because the SEC did not carry its burden of proving that Talbot, Fidelity and LendingTree were ‘linked through a continuous chain of fiduciary relationships.’” The Ninth Circuit disagreed, however, finding that such a continuous chain was not necessary.
“Talbot misappropriated information from Fidelity, a source to which he owed a fiduciary duty arising from a relationship of trust and confidence by virtue of his position on its Board,” Judge Kim Wardlaw wrote, joined by Sandra Ikuta and Senior Judge David Thompson. The case now goes back to the district so Morrow can sort out materiality.
Reached late Monday, Talbot’s lawyer Richard Marmaro of Skadden Arps said he had not yet reviewed the ruling.
— Dan Levine
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