Back in June Reuters reported that:
The U.S. Securities and Exchange Commission on Tuesday charged the former chief executive of Heartland Payment Systems Inc and his romantic partner with insider trading ahead of the payment processor's $4.3 billion takeover by Global Payments Inc .
Robert Carr, Heartland's founder and CEO, was accused of telling Katherine Hanratty in November 2015 that Global Payments had offered to buy Princeton, New Jersey-based Heartland for a premium and giving her a $1 million check with instructions to open a brokerage account and buy $900,000 of Heartland stock.
Hanratty did what Carr asked, and sold her stock for a $250,628 profit in April 2016, four months after the merger was announced, the SEC said in a complaint filed with the federal court in New Haven, Connecticut.
Apparently Hanratty was not acting as a straw man for Carr, but rather was the beneficiary of a tip (quid pro quo in return for sexual favors or maybe just a gift) from Carr, as the SEC complaint alleges:
On November 23, 2015, Hanratty emailed Carr to express her gratitude and stated “for the first time ever I feel a sense of relief knowing that I have some security.” Referring to the $1 million, Hanratty repeated that “I have done exactly what you recommended I do with it and made you the beneficiary of the account.” Carr replied via email that he was glad that she was not so stressed anymore.
So far all of this seems pretty run of the mill. Slam dunk for the SEC is the phrase that comes to mind. And, indeed, Fox reported that Hanratty settled the SEC charges and paid disgorgement of her profits and a $250,000 fine.
But here's where it gets interesting. Bloomberg is now reporting that:
Heartland Payment Systems LLC is suing its former CEO’s girlfriend for making insider trades based on tips he passed on about an upcoming merger. ...
In fact, Heartland is suing both Hanratty and Carr. Count I of the complaint alleges that Carr breached his Delaware corporate law fiduciary duty by disclosing the information to Hanratty. Count 2 alleges that Hanratty added and abetted Carr's breach in violation of state corporate law.
This is a very unusual suit. It's rare that an issuer sues an employee (even a former employee) for alleged insider trading. Not unheard of, but rare. As Richard Booth explains:
So why is it that issuers seldom seek disgorgement on their own? It is possible that the practice is common and quietly handled, but I doubt it. One obvious reason that issuers do not often sue their own for insider trading is an inherent conflict of interest. It is often the case that the culprits have the power to decide whether the corporation should sue. Still, that does not explain why there are few derivative actions in connection with insider trading. On the other hand, it appears that the number of derivative actions brought in tandem with securities fraud class actions has been increasing in recent years. Another somewhat less obvious reason for the disinclination of issuers to go after inside trading is that it might often amount to an admission that the company failed to disclose material information in a timely fashion and might trigger the filing of a securities fraud class action. Thus, as I have argued elsewhere, the disproportionate threat of securities fraud class actions and their potentially devastating collateral consequences may prevent publicly traded companies from self-policing.
Richard A. Booth, The Missing Link Between Insider Trading and Securities Fraud, 2 J. Bus. & Tech. L. 185, 206 n.104 (2007).
The fact that Heartland had had a change of ownership may be pertinent. The new owners may have had a beef with Carr.
So what will Hearland have to prove to win against Hanratty? “The elements of a claim for aiding and abetting a breach of a fiduciary duty are: (1) the existence of a fiduciary relationship, (2) the fiduciary breached its duty, (3) a defendant, who is not a fiduciary, knowingly participated in a breach, and (4) damages to the plaintiff resulted from the concerted action of the fiduciary and the non-fiduciary.” Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 172 (Del. 2002)
As for # 2, what Carr allegedly did was a breach of Delaware fiduciary duty law. Delaware courts have recognized a "a corporate claim for insider trading" based on the duty of loyalty. Pfeiffer v. Toll, 989 A.2d 683, 704 (Del. Ch. 2010), abrogated on other grounds by by Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011):
The plaintiff must show that: “1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.”
Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 838 (Del. 2011).
