The Settlement Noteholders argue that they did not trade on
any material nonpublic information. Instead, they contend that119
the only material nonpublic information which they received from
the Debtors during the confidentiality periods were the estimated
amounts of the Debtors’ tax refunds, which were disclosed by the
Debtors to the public before the Settlement Noteholders began to
trade again.
The Equity Committee and the TPS Group assert that the
Settlement Noteholders received additional nonpublic information
including the knowledge that a settlement was being discussed and
the relative stances the parties were taking in those
negotiations. In particular, the Equity Committee and the TPS
Group focus on the term sheets exchanged by the parties.
According to the Equity Committee, the parties were conceding
issues at a time when the public knew only that the Debtors,
JPMC, and the FDIC were engaged in contentious litigation.
Materiality of nonpublic information is determined by an
objective, “reasonable investor” test: “[T]he law defines
‘material’ information as information that would be important to
a reasonable investor in making his or her investment decision.”
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425
(3d Cir. 1997). With regard to information on events like a
potential merger, courts determine materiality based on a
balancing of both the “indicated probability that the event will
occur and the anticipated magnitude of the event in light of the
totality of the company activity.” Basic, Inc. v. Levinson, 485 Owl Creek alone argues that the magnitude factor is not
45
met here because, unlike a merger, settlement proposals are a
common and necessary component of bankruptcy cases. The Court
agrees that settlement proposals are common, but also notes that
statements of interest and merger proposals are just as common
and yet may be material. Basic, 485 U.S. at 238-39. What the
magnitude factor measures is not the fact that a proposal was
made, but what the result of the proposal would be if accepted
(i.e. the actual merger or settlement were consummated). SEC v.
Geon Indus., Inc., 531 F.2d 39, 47-48 (2d Cir. 1976).
120
U.S. 224, 238 (1988) (emphasis added).
The parties largely do not dispute that the magnitude of a
global settlement with JPMC and the FDIC would be great in this
case. See, e.g., SEC v. Geon Indus., Inc., 531 F.2d 39, 47-48
45
(2d Cir. 1976) (stating that “[s]ince a merger in which [a
company] is bought out is the most important event that can occur
in a small corporation’s life, to wit, its death, we think that
inside information, as regards a merger of this sort, can become
material at an earlier stage than would be the case as regards
lesser transactions - and this even though the mortality rate of
mergers in such formative stages is doubtless high.”). The issue
the parties in this case dispute is the probability that a
settlement would occur, specifically whether the negotiations
were too tentative and the parties were too far apart.
The Debtors and the Settlement Noteholders contend that
neither the knowledge of negotiations nor the parties’ relative
stances during the negotiations were material non-public
information because of the extreme distance between the parties’121
stances and the ebbs and flows of the negotiation process. See,
e.g., Taylor v. First Union Corp. of S.C., 857 F.2d 240, 244-45
(4th Cir. 1988) (holding that “preliminary, contingent, and
speculative” negotiations were immaterial because there was “no
agreement as to the price or structure of the deal”); Filing v.
Phipps, No. 5:07CV1712, 2010 WL 3789539, at *5-6 (N.D. Ohio Sept.
24, 2010) (finding that merger talks were not material where
parties had a “get acquainted” meeting and discussed executing a
confidentiality agreement); Levie v. Sears Roebuck & Co., 676 F.
Supp. 2d 680, 688 (N.D. Ill. 2009) (finding merger discussions
not material where they were preliminary in nature).
According to the Settlement Noteholders, it would have been
sheer speculation that JPMC’s position on one or more potential
settlement terms in March or November 2009 could have provided
assurance that JPMC would take that same position in future
complex, multi-party, multi-issue negotiations. In the context
of such a complex negotiation, the Settlement Noteholders argue
that the discussions could only be material once all the parties
reached an agreement in principal or at least came extremely
close to a deal. (D.I. 8429 at 10.)
The Court disagrees with this statement of materiality. The
Supreme Court has explicitly rejected the argument that there is
no materiality to discussions until an agreement-in-principle has
been reached. Basic, 485 U.S. at 237. In addition, the cases122
cited by the Plan Supporters are distinguishable as they deal
only with preliminary discussions. Unlike the cases cited, here
the parties executed confidentiality agreements, exchanged a
significant amount of information, and engaged in multi-party
negotiations for over a year. The discussions went far beyond a
mere “get acquainted meeting.” Filing, 2010 WL 3789539, at *5-6.
The Settlement Noteholders contend that whether a settlement
was likely to occur should be evaluated in light of the facts as
they existed at the time, not with the benefit of hindsight.
See, e.g., In re General Motors Class E Stock Buyout Sec. Litig.,
694 F. Supp. 1119, 1127 (D. Del. 1988) (“The probability of a
transaction occurring must be considered in light of the facts as
they then existed, not with the hindsight knowledge that the
transaction was or was not completed.”). According to the
Settlement Noteholders, in this case at the conclusion of both
confidentiality periods, the parties felt that the negotiations
were dead and, therefore, they were not material.
The Court is not convinced, however, by this contention.
See, e.g., SEC v. Gaspar, 83 Civ. 3037, 1985 WL 521, at *14
(S.D.N.Y. Apr. 16, 1985) (“The ultimate success of the
negotiations is only one factor to consider” in determining
materiality). The first set of negotiations ended in March, with
the Settlement Noteholders claiming they were a “disaster,” yet
the Debtors continued to negotiate with JPMC in April. (Tr. Centerbridge stated that such restrictions were taken
46
only out of “an abundance of caution” but admitted that an
acceptable counterproposal from JPMC might “nudge the
negotiations towards the ‘materiality’ end of the spectrum of the
settlement negotiations, in that an acceptable proposal could
lead to further fruitful negotiations.” (D.I. 8430 at 17-18.)
The Court is unconvinced by this explanation. Centerbridge
admits that it determined quickly that JPMC’s counter-proposal
was inadequate, yet continued to restrict trading until six days
after JPMC withdrew its counter-proposal.
123
7/20/2011 at 55-56.) In fact, Aurelius and Owl Creek berated the
Debtors for conducting settlement talks during that time without
them, indicating that the Settlement Noteholders themselves
viewed the negotiations as continuing and material. (Tr.
7/18/2011 at 73.)
The contention that settlement negotiations were dead (and
therefore not material) is also belied by the actions of
Centerbridge and Appaloosa. In July and August 2009 they engaged
in their own separate negotiations with JPMC, at which time they
both restricted their trading, even though they had not received
any other information from the Debtors.
46
The Equity Committee argues that the fact that there was
early agreement on several terms of the settlement negotiations
made them particularly material. The Settlement Noteholders
disagree, asserting that the market already understood the two
major components of any deal: that the Debtors were likely to
prevail in retaining ownership of the disputed bank deposits and
that, as a predicate for a plan, some agreement on the tax124
refunds would have to be reached between the Debtors and JPMC.
See Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 166 (2d Cir.
1980) (finding that the confirmation of facts that “were fairly
obvious to all who followed the stock . . . cannot be deemed
‘reasonably certain to have a substantial effect on the market
price of the security.’”).
Again, the Court disagrees. There is no evidence in the
record that the market knew that the Debtors would prevail on the
disputed bank deposits or that there would be a settlement on the
tax refunds. All the public knew was that the Debtors, JPMC, and
the FDIC were litigating those issues. In fact, the Court was
prepared to issue a decision on the summary judgment motions
filed by the parties on the bank deposit issue when the GSA was
announced.
The Settlement Noteholders argue further that the
probability of a settlement cannot be evaluated based on
agreement on a few terms but must be viewed as a whole. Despite
the fact that some terms did not change, the Settlement
Noteholders note that many terms were constantly changing as
later term sheets were exchanged. (Tr. 7/21/2011 at 109.) At
one point, JPMC changed its stance in the negotiations so
drastically that the Debtors viewed it as essentially
“reset[ting] the bookends” of any potential deal. (EC 16; Tr.
7/18/2011 at 108.) The Settlement Noteholders warn that if125
disclosure of the constantly changing settlement terms was
required, it “would result in endless bewildering guesses as to
the need for disclosure, operate as a deterrent to the legitimate
conduct of corporate operations, and threaten to ‘bury the
shareholders in an avalanche of trivial information.’” Taylor,
857 F.2d at 245.
This same argument was denounced by the Supreme Court when
it rejected the “agreement-in-principle” standard for evaluating
materiality of merger discussions and applies equally here.
Three rationales have been offered in support of the
“agreement-in-principle” test. The first derives from
the concern expressed in TSC Industries that an
investor not be overwhelmed by excessively detailed and
trivial information, and focuses on the substantial
risk that preliminary merger discussions may collapse:
because such discussions are inherently tentative,
disclosure of their existence itself could mislead
investors and foster false optimism. . . . The first
rationale, and the only one connected to the concerns
expressed in TSC Industries, stands soundly rejected,
even by a Court of Appeals that otherwise has accepted
the wisdom of the agreement-in-principle test. “It
assumes that investors are nitwits, unable to
appreciate - even when told - that mergers are risky
propositions up until the closing.” Disclosure, and
not paternalistic withholding of accurate information,
is the policy chosen and expressed by Congress.
Basic, 485 U.S. at 237 (quoting Flamm v. Eberstadt, 814 F.2d
1169, 1175 (7th Cir. 1987).
The Plan Objectors disagree with the Settlement Noteholders’
contention that the settlement negotiations were too tentative to
be material. The TPS Group asserts that over the course of
negotiations it became clear that a settlement was more probable126
(as issues were resolved) and that the funds available to the
estate were increasing. The Plan Objectors argue that the
materiality of the information is evident from the fact that as
soon as the Settlement Noteholders were free to trade on that
information they did: engaging in what the Equity Committee
characterizes as a “buying spree” concentrating on acquiring (at
a discount) junior claims because the Settlement Noteholders knew
(although the public did not) that the junior creditors were
likely to receive a recovery. (AOC 18; AOC 54; AOC 62; Au 8.)
The Equity Committee also asserts that a materiality
inference can be drawn from the fact that the Settlement
Noteholders requested (and the Debtors granted) a termination of
the Second Confidentiality Period a day early, on December 30,
2009, in order to permit them to trade before the end of the
year. (Tr. 7/18/2011 at 111.) See, e.g., Basic, 485 U.S. at 240
n.18 (“We recognize that trading (and profit making) by insiders
can serve as an indication of materiality.”); United States v.
Victor Teicher & Co., No. 88 CR. 796, 1990 WL 29697, at *2
(S.D.N.Y. Mar. 9, 1990) (citing the “very fact of [defendant’s]
trading” as “evidence of the materiality of the information”).
The Settlement Noteholders respond that materiality cannot
be gleaned from the trades in question, however, because some of
the Settlement Noteholders were selling while others were buying
or not trading at all. (AOC 18; AOC 54; AOC 62; Au 8.) If the127
settlement discussions had any materiality, the Settlement
Noteholders argue that they would have all traded in the same
fashion. They point to Appaloosa and Centerbridge as an example.
Both received a summary of the Debtors’ April negotiations and
JPMC’s August counter-offer during their own separate
negotiations, yet they engaged in opposite trades after receiving
that information. (AOC 54; AOC 62.) In another instance,
Aurelius sold PIERS on March 8, 2010, four days before the
announcement of the GSA, after which the price of the PIERS
skyrocketed. (Au 8.) According to the Settlement Noteholders,
if Aurelius possessed material nonpublic information regarding
the settlement, it would not have made such an unwise trade.
The fact that the Settlement Noteholders made unwise or
contrary trades, however, does not provide a defense to an
insider trading action. See, e.g., SEC v. Thrasher, 152 F. Supp.
2d 291, 301 (S.D.N.Y. 2001) (concluding that a tippee is
potentially liable for insider trading even if it loses money by
trading on false information) (citing Bateman Eichler, Hill
Richards, Inc. v. Berner, 472 U.S. 299, 318 (1985)).
The Court does find it difficult to draw any conclusions
from the Settlement Noteholders’ trades. The Settlement
Noteholders actively traded in the Debtors’ securities prior to,
and after, the confidentiality periods. It is possible that
their trades were based on the publically disclosed information128
regarding the tax refunds, but because full discovery on the
Settlement Noteholders’ internal trading decisions has not been
permitted to date, the Court is unable to reach any conclusion
based on the trades alone.
Based on the evidence presented thus far, however, it
appears that the negotiations may have shifted towards the
material end of the spectrum and that the Settlement Noteholders
traded on that information which was not known to the public.
Consequently, the Court finds that the Equity Committee has
stated a colorable claim that the Settlement Noteholders received
material nonpublic information. Further discovery would help
shed light on how the Settlement Noteholders internally treated
the settlement discussions and if they considered them material
to their trading decisions.
