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United States Securities and Exchange Commission v. Berrettini

United States District Court, N.D. Illinois, Eastern Division

November 2, 2016

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
MORANDO BERRETTINI and RALPH J. PIRTLE, Defendants.

          MEMORANDUM OPINION AND ORDER

          ROBERT M. DOW, JR. UNITED STATES DISTRICT JUDGE

         This matter is before the Court on the motion [247] of Plaintiff the United States Securities and Exchange Commission (“SEC”) for judgment and imposition of remedies. For the reasons stated below, the Court enters final judgment in favor of the SEC and against Defendants Morando Berrettini (“Berrettini”) and Ralph J. Pirtle (“Pirtle”) (collectively, “Defendants”). Berrettini and Pirtle are each required to pay, individually and not jointly and severally: (1) disgorgement in the amount of $120, 311.00; (2) pre-judgment interest in the amount of $65, 011.00; (3) and a civil penalty in the amount of $120, 311.00. The total judgment against each Defendant is $305, 633.00

         I. Background[1]

         The SEC brought a complaint against Berrettini and Pirtle for engaging in deceptive practices in connection with the purchase and sale of securities in three publicly traded companies between December 2005 and June 2006. The governing complaint [5] alleges that Pirtle misappropriated inside information from his employer, Royal Philips, N.V. (“Philips”), and provided it to Berrettini with the intent to enable Berrettini to trade on the information. Pirtle was a member of Philips' due diligence team for three transactions in which Philips was acquiring or considering acquiring publicly traded companies that specialize in medical devices. The three companies were Lifeline Systems, Inc. (“Lifeline”), Invacare, Inc. (“Invacare”), and Intermagnetics Corporation (“Intermagnetics”). Philips ultimately acquired Lifeline and Intermagnetics. According to the complaint, Pirtle misappropriated Philips' inside information in violation of his obligations to Philips and “tipped” Berrettini about the proposed acquisitions of the three companies. Berrettini, a real estate broker, consultant, and preferred vendor for Philips, used the information from Pirtle to trade in the shares of Lifeline, Invacare, and Intermagnetics and made actual profits of $240, 621. Also according to the complaint, between 2003 and January 2007, Berrettini made a series of payments to third parties on Pirtle's behalf, totaling more than $226, 000, to pay for things like cars, trips to Las Vegas, and gambling. The complaint alleges that these payments were not “loans, ” as Pirtle contended, but instead were payments for business opportunities and inside information from Philips.

         The SEC brought six claims against Defendants for violation of section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Counts One, Two and Three were brought against both Defendants based on the purchase and sale of securities in Lifeline, Invacare, and Intermagnetics, respectively. Counts Four, Five and Six were brought against Berrettini only and allege that he misappropriated and used for his own benefit Philips' material nonpublic information in connection with the purchase and sale of securities in Lifeline, Invacare, and Intermagnetics, respectively. The case was tried before a jury beginning on September 9, 2015 and concluding on September 24, 2015. Defendants' primary defense was that Pirtle simply provided information to Berrettini concerning the general geographic areas in which Philips sought to make acquisitions so that Berrettini could perform market research, and Berrettini then independently researched publicly traded medical device companies in the area and bought the stock of Lifeline, Invacare, and Intermagnetics based on his research results and “hunches.” Defendants also contended that the payments Berrettini made to third parties on Pirtle's behalf were simply loans, not payments for business opportunities or inside information. At the conclusion of trial, the jury found for the SEC and against Defendants on all counts.

         The SEC now moves for final judgment and the imposition of remedies. The SEC seeks to permanently enjoin Defendants from violating Section 10(b) of the Exchange Act and Rule 10b-5. The SEC also seeks an order requiring Defendants to disgorge their ill-gotten gains and to pay prejudgment interest and civil penalties.

         II. Analysis

         A. Permanent Injunction

         Once the SEC has demonstrated that a defendant has violated Section 10(b) or Rule 10b-5, “it ‘need only show that there is a reasonable likelihood of future violations in order to obtain [injunctive] relief.'” SEC v. Yang, 795 F.3d 674, 681 (7th Cir. 2015) (quoting SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982)); see also 15 U.S.C. § 78u(d)(1). To assess the likelihood that a defendant will commit future violations, the Court assesses “‘the totality of the circumstances surrounding the defendant and his violation.'” Id. (quoting Holschuh, 694 F.2d at 144). These circumstances may include (1) the gravity of the harm caused by the offense; (2) the extent of the defendant's participation and degree of scienter; (3) the isolated or recurrent nature of the violation; (4) the likelihood that the defendant's customary business activities could involve him in future violations; (5) the defendant's recognition of his own culpability; and (6) the sincerity of the defendant's assurances against future violations. Id. The Court “may determine that some of the factors are inapplicable in a particular case” and “take other relevant factors into account in deciding whether to impose the bar and, if so, its duration.” SEC v. Benger, 64 F.Supp.3d 1136, 1139 (N.D. Ill. 2014). However, a “defendant's past violation of the securities laws, without more, is insufficient to support permanent injunctive relief.” Id. (citation omitted).

         The SEC argues that the totality of circumstances warrant permanently enjoining both Defendants from committing future violations of Section 10(b) and Rule 10b-5. Pirtle does not object to the entry of a permanent injunction against him, but argues that the SEC improperly analyzes the circumstances surrounding his securities violations. Berrettini does not address whether a permanent injunction should be entered against him.

         Taking into account the totality of circumstances surrounding Defendants' violations, the Court concludes that entry of a permanent injunction is warranted. First, considering the gravity of the harm, the SEC has presented evidence that Berrettini made a profit of $240, 622 trading in Lifeline and Intermagnetics stock based on the inside information he obtained from Pirtle. Beyond the actual profits made in this case, “insider trading causes harm to the credibility of the public markets, ” SEC v. Michel, 521 F.Supp.2d 795, 830 (N.D. Ill. 2007), by making would-be investors hesitant “to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law, ” United States v. O'Hagan, 521 U.S. 642, 658 (1997). This factor weighs in favor of injunctive relief.

         Second, both Defendants participated in the securities violations and acted with scienter. “In the Seventh Circuit, both knowledge and recklessness satisfy the scienter requirement.” SEC v. Ferrone, 163 F.Supp.3d 549, 568 (N.D. Ill. 2016). In order to rule in the SEC's favor, the jury necessarily found that both Defendants acted either knowingly or recklessly. Specifically, in order to rule in the SEC's favor, the jury necessarily found that Berrettini “bought or sold securities knowingly or recklessly on the basis of material non-public information provided to him by . . . Pirtle” and “knew or should have known that he received th[e] information as a result of a violation of fiduciary duty or other duty of confidentiality.” [237] at 17-18 (jury instructions). The jury also necessarily found that Pirtle “knew or was reckless in not knowing that . . . Berrettini would buy or sell securities on the basis of information” that Pirtle provided. [237] at 17.

         Pirtle argues that the because the jury may not have believed that his participation in the securities violations was “knowing, ” and that because he did not trade any securities or directly profit from Berrettini's trades, he should be held to a lesser degree of culpability than Berrettini. However, the Seventh Circuit recognizes that “‘[d]eliberate ignorance . . . is a form of knowledge'” and that “honest ‘white heart/empty head' good faith is inconsistent with a subjectively reckless state of mind.” Ferrone, 163 F.Supp.3d at 569 (quoting SEC v. Jakubowski, 150 F.3d 675, 681-82 (7th Cir. 1998)). Moreover, while Pirtle did not himself trade in Lifeline, Invacare, and Intermagnetics stock, he did owe a fiduciary duty to his employer, Philips. As the Supreme Court has explained, “[a] tippee trading on inside information will in many circumstances be guilty of fraud against individual shareholders, a violation for which the tipper shares responsibility. But the insider, in disclosing such information, also frequently breaches fiduciary duties toward the issuer itself.” Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 313 (1985). The jury heard evidence that Philips trained Pirtle on insider training and the handling of confidential information, and that Pirtle disregarded this training. Further, Philips entrusted Pirtle with confidential information about its acquisition targets and Pirtle betrayed that trust by sharing the information with Berrettini, whether knowingly by providing Berrettini with the names of the targets or recklessly by providing Berrettini with the general geographic area in which the targets were located. Moreover, Pirtle's brief fails to acknowledge the evidence presented at trial that Pirtle took more than $200, 000 in undisclosed “loans” from Berrettini in violation of Philips' policies. Therefore, the Court concludes that this factor also weighs in favor of a permanent injunction.

         Third, Defendant's violations of the securities laws were recurrent, rather than a onetime, isolated occurrence. Berrettini, acting on information provided by Pirtle, traded in the stock of three publicly held companies over a ...


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