SEC v Materia
Securities and Exchange Commission v. Anthony Materia
745 F.2d 197 (1984)
Anthony Materia, an employee of the printing business Bowne in New York City, had been entrusted with financial documentation containing sensitive information. Although the actual names of the corporations discussed in the documents were missing, enough details remained to allow Materia to deduce which companies were the targets of upcoming purchase bids. Materia then used this confidential information to purchase stock in the target companies in advance of the tender offers and then sold this stock once the offer had been made public, thereby making a profit. This had already occurred four times before the Securities and Exchange Commission (SEC) obtained a permanent injunction against further trading by Materia during a bench trial in front of Judge Brieant in District Court. Judge Brieant further agreed with the SEC and ordered Materia to return the nearly $100,000 in profits he had made with the stolen confidential information. Material appealed the decision, which is the subject matter of this brief.
The first issue addressed by the Appeals Court of the Second Circuit was whether the Court has the proper authority to invoke an equity jurisdiction, in addition to injunctive relief. Materia also appealed the lower court’s holding that his trading activities on confidential information represented violations of the Securities and Exchange Act of 1934, specifically Section 10(b) and Rule 10b-5. Materia argued that his employer suffered no injury as a result of his trading on confidential information and also had no duty to disclose material nonpublic information to the sellers of equity shares. The final issue raised on appeal was Materia’s claim that the confidential information was unconnected to his trading activity.
The Second Circuit Court of Appeals affirmed the lower courts holding concerning all issues raised on appeal. Materia was permanently forbidden to continue trading on confidential information and was required to return all profits made by such trading activity.
Rationale of the Court
Judge Irving R. Kaufman of the Second Circuit wrote the unanimous decision by the three judge panel within three days of hearing arguments in the case. When considering the jurisdictional issues raised by the appellant Materia the judges agreed that the case before them did not represent a civil suit to reclaim losses suffered by investors, otherwise called a private right of action, but an action brought about by the SEC. The Second Circuit judges recognized Congress’ intention to create laws which protect the fairness of financial market and this intention had been encoded into the Securities and Exchange Act of 1934. Under Section 21(d) the SEC has been empowered by Congress to obtain a temporary or permanent injunction against any person who is in violation of the securities laws. In addition, when Congress empowered the SEC to enforce these laws the ability of the courts to provide an equitable remedy was also invoked. The SEC therefore had standing to request both injunctive and equitable relief under securities laws.
The Appeals Court then addressed the issue of whether Materia had in fact violated securities law. Under Section 10(b) of the Securities and Exchange Act the SEC has been given the power to make rules. In 1942, the Commission established Rule 10b-5 forbidding anyone from engaging in fraud or deceit during the sale or purchase of securities. The Court cited well-established jurisprudence that has repeatedly upheld the prohibition on using stolen confidential information to commit securities fraud. In particular, the judges did not agree with Materia’s argument that Rule 10b-5 only applied to corporate insiders.
In response to Materia’s argument that he was unaware of the confidential nature of the information, the Second Circuit judges agreed with the lower court that Bowne went to great lengths to ensure confidentiality. The judges also agreed with the lower court that Materia’s theft of confidential information did cause harm to his employer’s reputation. Based on this alone, Materia was judged to have committed fraud against Bowne in violation of Section 10(b) and Rule 10b-5. The three judge panel also dismissed as spurious Materia’s argument that the theft of the confidential information was unconnected with his trading activity. The court held that Materia had committed securities fraud and injured the reputation of his employer.
The statutory basis for the Second Circuit Court of Appeals’ decision in SEC v. Materia was the Securities and Exchange Act of 1934, Sections 21(b) and 10(b). The Court also relied on wording in Rule 10b-5 that forbids persons from committing fraud or deceit during the purchase or sale of securities. Injunctive relief conferred by the Court’s decision was based on these statutes and rules, but equity relief was conferred by the lack of any restrictive language in Section 21(b) and the Court’s judicial power to provide such relief. Once the Court had determined that Materia had committed securities fraud it was authorized to grant a permanent injunction against future trading on confidential information and to force Materia to return all ill-gotten gains.
SEC v. Materia, 745 F.2d 197 (2d Cir. 1984).
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