Securities – Insider trading – Romantic partnership

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Where a defendant investor has moved to dismiss an insider trading complaint, the motion must be denied based on evidence of a tip he received from a romantic partner.

“This is a civil-enforcement action brought by the Securities and Exchange Commission against Vlad Spivak and Shirmila Doddi for insider trading in violation of section10(b) of the Securities Exchange Act of 1934, 15 U.S.C. section78j(b), and Rule 10b-5, 17 C.F.R. section240.10b-5. Based on the misappropriation theory of insider trading, the complaint alleges that Doddi, a financial analyst at a bank, tipped her romantic partner Spivak, a day trader, about a confidential pending acquisition of one of the bank’s clients. After receiving the nonpublic information from Doddi, Spivak purchased shares of the target company in both his now-deceased mother’s trading account and his own trading accounts, ultimately realizing profits of $222,357.

“In two separate motions –– one concerning the trading in his accounts and one concerning the trading in his mother’s account –– Spivak has moved to dismiss the complaint under Fed. R. Civ. P. 9(b) and 12(b)(6). Among other arguments, Spivak contends that the complaint fails to allege that Doddi received an objective, pecuniary personal benefit by tipping him. According to Spivak, who relies on United States v. Newman, 773 F.3d 438 (2d Cir. 2014), absent such a pecuniary personal benefit to Doddi, she did not breach a fiduciary duty to her employer. Therefore, absent such a breach by the tipper, Spivak contends that he has no derivative liability as the tippee.

“The law in the First Circuit, based on the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), is that a tipper receives a sufficient personal benefit if she provides a gift of nonpublic information to a trading relative or friend with the intent that the tippee trade on that information. See SEC v. Rocklage, 470 F.3d 1, 7 n.4 (1st Cir. 2006). That holding may be in question given the Supreme Court’s grant of certiorari in a case involving a similar issue. Nonetheless, it is currently the controlling law in this circuit. …

“The complaint alleges that Doddi and Spivak were romantic partners for almost a year and communicated on a near-daily basis. It also alleges that Doddi initially rejected Spivak’s requests for confidential information, even though he told her that ‘insider trading was not a big deal and that individuals rarely get caught.’ Furthermore, it alleges that Doddi relented and gave Spivak material nonpublic information about an upcoming acquisition with the intent that he would purchase shares of the target company.

“The Court’s decision is a narrow one and follows directly from Dirks, Rocklage, and [SEC v. Sargent, 229 F.3d 68, 77 (1st Cir. 2000)]: accepting the allegations as true, the complaint plausibly pleads that Doddi received a personal benefit by tipping Spivak, and thus breached her fiduciary duty to her employer. …

“Spivak’s first argument –– that his romantic partner Doddi did not receive a personal benefit by gifting him the information about the upcoming acquisition –– is squarely contradicted by Dirks and the controlling law of this circuit. …

“The complaint alleges that Doddi and Spivak had a meaningfully close, nearly year-long romantic relationship, and that she made a gift of nonpublic information directly to him with the intent that he would benefit by purchasing shares of the target company. Even under Newman, those allegations state a claim for insider trading.

“Accordingly, the complaint plausibly pleads that Doddi received a personal benefit by disclosing nonpublic information to Spivak, and thus breached a duty to her employer. …

“It is well-established that a tippee cannot be held civilly liable for insider trading unless ‘the tippee knows or should know that there has been a breach’ of the tipper’s fiduciary duty. … Spivak contends that the complaint fails to allege that he should have known that Doddi received a personal benefit by disclosing information that was confidential.

“Spivak’s argument is unpersuasive, because the complaint alleges that he was directly tipped by Doddi, his romantic partner. …

“The complaint also sufficiently pleads that Spivak intended to manipulate or deceive by intentionally or recklessly purchasing shares of [American Dental Partners, Inc. (ADPI)] while in possession of material nonpublic information. …”

Securities and Exchange Commission v. Spivak, et al. (Lawyers Weekly No. 02-272-16) (23 pages) (Saylor, J.) (USDC) (Civil Action No. 15-13704-FDS) (July 12, 2016).

Click here for the full-text opinion.