The opinion of the court was delivered by: Judge Robert M. Dow, Jr.
MEMORANDUM OPINION AND ORDER
In 2005 and 2006, Defendant Ralph J. Pirtle ("Pirtle") was assigned to due diligence teams considering whether his employer, Royal Philips ("Philips"), ought to acquire three medical services companies: Lifeline, Invacare, and Intermagnetics. Pirtle, as Director of Real Estate, was tasked with analyzing how real estate issues should factor into Philips' decisions. Pirtle shared information that he learned in the due diligence process with Defendant Morando Berrettini ("Berrettini"), President of Berco Realty ("Berco") and occasional contractor for Philips. Berrettini used the information that he obtained from Pirtle to make well-timed trades in Lifeline, Invacare, and Intermagnetics and turned a substantial profit when Philips acquired two of those companies.
The Securities and Exchange Commission ("SEC") alleges that Defendants' conduct amounts to insider trading: Pirtle, the SEC claims, misappropriated information from Philips and tipped Berrettini, who traded on the tips. In support of its claim that Berrettini's trades were more than educated guesses and that the information Pirtle shared with Berrettini was not a proper part of his work for Philips, the SEC observes that (among other things) Berrettini paid Pirtle more than $200,000 between 2003 and 2007, Pirtle did not have permission to use Berrettini or Berco in conducting due diligence on Lifeline, Invacare, or Intermagnetics, and the extraordinary timing of Berrettini's trades in Lifeline, Invacare, and Intermagnetics.
Defendants have moved for summary judgment. They insist that Pirtle merely gave Berrettini information sufficient for him (and Berco) to research the areas of Boston, Cleveland, and Albany where Lifeline, Invacare, and Intermagnetics were located. In other words, Defendants argue that Pirtle was just doing his job as usual, which frequently involved relying on outside vendors. Berrettini then combined the general information Pirtle gave him to do legitimate research on submarkets of Boston, Cleveland, and Albany with public information about Philips' interest in acquiring medical services companies, and that gave him a "hunch" that Philips was likely to acquire Lifeline, Invacare, and Intermagnetics. As for Berrettini's payments to Pirtle, Defendants insist they were legitimate loans, which Pirtle began repaying on time, in 2008, when the notes came due.
For the reasons stated below, Defendants' motions for summary judgment [87, 90] are respectfully denied.
There is no dispute about when Berrettini bought and sold stock in Lifeline, Invacare, and Intermagnetics; the size and frequency of payments from Berrettini to Pirtle; and that Pirtle gave Berrettini at least some information that he learned while conducting due diligence on the target companies. At this point, the core of the dispute between Defendants and the SEC is why Defendants acted as they did. For instance, the parties disagree whether Pirtle shared information about the target companies with Berrettini because he was (legitimately) being used as an outside contractor to help Pirtle with his substantial workload, or if the "research projects" that Pirtle claims to have given Berrettini were simply a cover for Pirtle's tips about Philips' business plans. The parties disagree whether Berrettini was just smart and lucky enough to buy Lifeline, Invacare, and Intermagnetics when he did, or if it is impossible to imagine that he would (or could) have bought the stocks in question without taking advantage of confidential information from Pirtle. The parties disagree whether Berrettini's payments to Pirtle were legitimate loans or gifts/bribes intended to keep Philips' business and inside information flowing from Pirtle to Berrettini. The parties disagree whether Pirtle's incomplete responses to questions about Berrettini's trades in Lifeline stock by the National Association of Securities Dealers ("NASD") were just off-the-cuff statements, or implicit indications of Pirtle's awareness that he violated insider trading laws.*fn1
A. Pirtle's Due Diligence for Philips on Lifeline, Invacare, and Intermagnetics
On December 6, 2005, Pirtle was invited to be on the due diligence team for the potential acquisition of Lifeline, codename "Project Mindpeace." Pirtle testified that he was tasked with providing the team with information about the real estate market for commercial office and warehouse space in specific areas of suburban Boston. That, Pirtle believed, meant analyzing the strength of that real estate market, rental rates, and building values in general. Within a few days of getting his due diligence assignment, Pirtle claims to have telephoned Berrettini to ask for assistance. According to both Pirtle and Berrettini, Pirtle provided geographic parameters - "south suburban Boston submarket" - and asked for general information about "market lease rates and market values." Berrettini testified that after the call from Pirtle he asked his son, Ezio Berrettini ("Ezio"), the Vice President of Berco, to search for the market information Pirtle had requested on behalf of Philips. Ezio testified that
To the best of my recollection, I was given an assignment to find both sale and lease comps in the Boston area. I was given a range of square footage for both. It was information that was required right away and it just had to be basic - a basic idea of the market, quick and dirty as I remember the phrase being [* * *].
In addition to the market research, Berrettini asked Ezio to research publically traded medical services companies in that same geographic area. Ezio's research allegedly turned up two companies that fit the description, Lifeline and Boston Scientific.
The SEC points to different facts: Philips repeatedly told members of the due diligence team for Mindpeace/Lifeline, in writing, that information about potential acquisitions was confidential. Indeed, Pirtle does not dispute that. According to his own testimony, Pirtle understood that the geographic location of the target company was confidential information. He understood that "[i]f you disclose the real estate location, then you could easily determine the occupant of the location and the company's name." The SEC further emphasizes that Pirtle knew that the information he had about Lifeline could not be shared with anyone outside the due diligence team, and even then only on a restricted basis. For example, in the middle of December 2005, Pirtle received an e-mail from Philips making the point:
You are receiving this e-mail because you are (or may become involved in Project Mindpeace. The purpose of this e-mail is to remind you of your obligations with respect to confidentiality and insider trading. * * * In connection with your involvement in Project Mindpeace, you may receive (or have received) confidential and/or price sensitive information relating to this project (hereinafter referred to as "Confidential Information").
All such Confidential Information may only be used in connection with Project Mindpeace. It is essential that you treat all Confidential Information strictly confidential and do not disclose it to someone other, except for disclosures to other members of your team on a "need to know basis". If you believe that it is necessary to add someone to the team or to disclose it someone other than another team member, you are required to seek the prior permission of one of the following persons: Paul Bromberg Edo Pfennings Maarten Kwik Arno van Hekesen If a person is added to the team, please inform the undersigned [Arno van Hekesen] thereof by e-mail and forward such person a copy of this email so that he or she is reminded of his obligations with respect to confidentiality and insider trading.
Pirtle did not get permission from Bromberg, Pfennings, Kwik, van Hekesen or anybody else to share information with Berrettini or Berco for his work on Project Mindpeace. The SEC's position is that having used Berrettini/Berco on other projects - non-due diligence projects - was not enough to authorize Pirtle's use of Berrettini/Berco on Project Mindpeace and, especially given the confidentiality notices, that should have been obvious.
The parties repeat their stories in connection with Philips' interest in Invacare (Project Vita-I) and Intermagetics (Project J or Jumbo). Pirtle became part of the due diligence team for Invacare in January 2006. Soon after getting his assignment, Pirtle claims that he contacted Berrettini for assistance. Pirtle testified that he asked Berrettini to provide him with "rental rates and values within a certain geographical area west of Cleveland" (where Invacare is located). Berrettini then allegedly passed the assignment to his son, asking the same questions as before about the real estate market and medical services companies in that area. Pirtle became part of the due diligence team for Intermagnetics in April 2006. Soon after, Pirtle allegedly gave Berrettini a "research project" about a particular area in Albany, New York. Berrettini then passed his son the research questions from Pirtle and, as in the other cases, asked his son to research medical services companies in the area.
The SEC takes the same dim view of Defendants' conduct in relation to Invacare and Intermagnetics that it did in relation to Lifeline: the circumstantial evidence - especially the well-timed trades and the absence of specific authorization to give Berrettini/Berco information related to Philips' acquisition targets - is sufficient to allow a reasonable jury to conclude that the "research assignments" were, at best, a ruse.
B. Berrettini Trades in Lifeline, Invacare, and Intermagnetics
According to Defendants, Pirtle gave Berrettini a research project related to his assignment on Project Mindpeace/Lifeline sometime in the first or second week of December 2005. Between December 15, 2005 and January 18, 2006, Berrettini and two entities that he controlled (Northchase I Venture & Berco Jaxon) proceeded to buy more than 17,000 shares of Lifeline stock for approximately $655,000. On January 19, 2006, Philips publically announced its acquisition of lifeline. The stock price went up almost 19%.
Defendants assert that Pirtle gave Berrettini a research project related to his due diligence assignment on Invacare in January 2006. On February 1, 2006, Berritini bought 2,000 shares of Invacare for $70,000. Philips ultimately decided not to acquire Invacare.
As to Intermagnetics, Defendants claim that Pirtle gave Berrettini a research project related to his due diligence assignment in April 2006. Between April 28, 2006 and May 1, 2006, Berrettini and the entities he controlled bought 16,000 shares of Intermagnetics for more than $300,000. Philips publically announced its acquisition of Intermagnetics on June 15, 2006. The stock price went up over 26%.
Defendants explain that Berrettini bought these stocks by connecting the dots between disparate bits of public information and the clues in the research assignments that Pirtle gave him about submarkets in Boston, Cleveland, and Albany. For instance, Berrettini explains that Pirtle wanted Berrettini to do research on sales data in addition to lease data, which Berrtettini claims was unusual. Also unusual was that Pirtle did not disclose the Philips division seeking the information. Pirtle wanted Berrettini to do the research quickly. As for public information, there had been a number of articles in 2005, in the Wall Street Journal and elsewhere, suggesting that Philips was interested in acquiring medical services companies. Add that to Ezio's research and Berrettini came up with "hunches" that Philips had targeted Lifeline, Invacare, and Intermagnetcis for acquisition. After discussing Lifeline with his partners in Northchase and Berco, Berrettini informed Pirtle that he planned to buy Lifeline shares. According to Defendants, Pirtle told Berrettini not to do anything based on the information that Pirtle had provided, and that Pirtle did not know whether Lifeline was an acquisition target. The story is substantially the same with regard to Invacare and Intermagnetics.
The SEC argues that Defendants' "hunch" story is highly implausible. Berrettini admits that he is not a sophisticated investor and that he has very little experience in stock trading. Even so, he invested over more than million dollars on three medical services companies after doing a little research on Google and Yahoo! Finance. And he hit the jackpot; the largest stock purchase that he ever made (Lifeline) also turned out to be his most successful. The simpler explanation for Berrettini's near-miraculous success in picking three medical services companies that Philips was considering buying and two that it actually acquired is that Pirlte tipped him. And Pirtle was motivated to help Berrettini because Berrettini had been giving Pirtle tens of thousands of dollars, including two checks for $15,000 payable to a Las Vegas casino close to the time when Pirtle gave Berrettini the "research projects."
C. Berrettini's Payments to Pirtle
The parties agree that Berrettini sent money to Pirtle on the following schedule:
December 3, 2004
December 17, 2004
December 31, 2004
January 4, 2005
$3,800 February 24, 2005 $5,900
March 10, 2005 $15,000 April 21, 2005 $25,000 April 25, 2005 $10,000 June 30, 2005
July 15, 2005 $5,000
August 26, 2005
December 5, 2005
February 1, 2006 $15,000 December 29, 2006 $36,000 January 24, 2007 $15,000
That's more than $200,000 between 2003 and 2007. The parties do not agree why Berrettini sent Pirtle so much money.
Defendants' position is that these payments from Berrettini to Pirtle were legitimate loans, intended to be repaid, with interest, after five years. According to Defendants, in the summer of 2003, Berrettini offered to loan Pirtle approximately $200,000 in lieu of a home equity line of credit. Berrettini offered a good interest rate, significantly better than Pirtle could get elsewhere. Pirtle does not argue that he needed the loans because he was short on funds, but rather that he borrowed money from Berrettini because it made good economic sense. The loans were supposed to be a win-win for Pirtle and Berrettini: Pirtle would get a great rate and Berrettini would get a decent return on his money, better than a savings account at least. On top of that, Defendants admit Berrettini wanted to keep Pirtle happy. Berrettini got significant business as a vendor for Philips and he wanted Pirtle to keep sending work his way.
Pirtle began repaying the loans in 2008, and has, by now, repaid all the (alleged) loans. Defendants also emphasize that the payments both pre- and post-date the alleged illicit tips, which they think means they cannot be viewed as part of a quid pro quo. Only two of the payments support the SEC's story - the payments on December 5, 2005 and February 1, 2006 - and focusing on those two transactions distorts Defendants' relationship.
The SEC, for its part, thinks that the payments were bribes. Berrettini wanted to keep getting Philips' business and paying Pirtle helped assure that would happen. The SEC also points out that Pirtle violated Philips' business policies by taking money on the side from one of Philips' vendors. Pirtle admits that Philips would have fired him had it known about the "loans." The SEC also emphasizes the timing of the December 2005 and February 2006 payments. From December 8 to December 11, Defendants were together at the Monte Carlo Resort & Casino in Las Vegas. The trip began only one day after Pirtle learned that Project Mindpeace was about Lifeline. The trip ended only three days before Berrettini began buying shares of Lifeline. While in Las Vegas, Berrettini gave Pirtle a check for $15,000, payable to the casino. On February 2, 2006, one day after ...