Nytronics stock and the joint venture failed. Rothberg then brought a suit against Rosenbloom for the funds he lost. The Third Circuit stated, without even mentioning the misappropriation theory, that Rosenbloom, as a fiduciary to Nytronics, owed it a duty not to disclose information that would cause others to buy Gulton stock, thereby making it difficult for Nytronics to merge with Gulton. Rothberg, 771 F.2d at 822. The court then cited U.S. v. Newman, 664 F.2d 12 (2d. Cir. 1981), a case that had applied the misappropriation theory, and stated that "an insider on either side of a proposed transaction violates the insider trading rule when he uses insider information in violation of the fiduciary duty owed to the corporation to which he owes a duty of confidentiality." Rothberg, 771 F.2d at 822. It therefore seems as if the Third Circuit was applying the misappropriation theory, see also id. at 824, (Higginbotham, J., concurring) (majority incorrectly attempts to use misappropriation theory), but it is not clear whether they in fact did so or not.
The misappropriation theory has also been adopted by the Second, Seventh and Ninth Circuits and applied in a variety of contexts. See e.g., Newman, 664 F.2d 12 (2d. Cir. 1981) (employees of investment banking firm used nonpublic material information received during the course of employment to trade in securities of companies about which they had received the information), Cherif, 933 F.2d at 410, (employee used identification card to gain access to former employer's premises and gain confidential information about impending tender offers) and Clark, 915 F.2d 439 (employee held liable for trading in stock of company his employer's parent company intended to acquire).
Particularly interesting for our purposes is the application of the misappropriation theory by the Southern District of New York in U.S. v. Reed, 601 F. Supp. 685 (S.D.N.Y. 1985), rev'd on other grounds, 773 F.2d 477 (2d. Cir. 1985). In strikingly similar facts to this case, Reed involved a father who, as an insider to a corporation that was on the brink of a merger, disclosed the information to his son in confidence. His son used the information in disregard of their confidential relationship and traded. Reed, 601 F. Supp. at 703-18. The court applied the misappropriation theory to hold the son liable for trading. While cautioning that the mere existence of a family relationship does not mean that there is a relationship of trust or confidence, the Reed court nonetheless was able to conclude that allegations of a confidential relationship between the father and son was enough to bring the case within the misappropriation theory and withstand a motion to dismiss. Id. at 717.
Applying the principles delineated above to the instant case, we note that Mrs. Lenfest could arguably be said to have misappropriated information from her husband and used it to her benefit. Her husband clearly has a fiduciary duty to the shareholders of Liberty as a member of its Board of Directors and the information that Mrs. Lenfest received was clearly inside information. Furthermore, Mr. Lenfest has admitted in his affidavit that he has a confidential relationship which includes sharing such important information with his wife and indeed, he states that she has always maintained his trust, perhaps until now.
Nevertheless, the defendants argue that since Mrs. Lenfest did not trade in Liberty stock but instead traded in TCI stock, and that since TCI was not a company to which Mr. Lenfest had a fiduciary duty, Mrs. Lenfest could not be said to have misappropriated information that was given in violation of his fiduciary duty. Defendants have obviously confused the discussion in Dirks, which concerned tippee liability and not the misappropriation theory, with the issues presented here. Dirks involved the classic theory of insider trading, and unlike the misappropriation cases, required that the sellers have at least placed their trust and confidence in the trader. In contrast, the broad formulation of the misappropriation theory as expressed by the Ninth Circuit in Clark, and which we have adopted and delineated earlier, merely requires a showing that the information was misappropriated in violation of a duty of trust or confidence. See also Reed, 601 F. Supp. at 699 (Dirks rationale on tippee theory of liability does not inform misappropriation analysis). While it is true that if Mrs. Lenfest had traded in Liberty stock the facts of this case would have brought us squarely within the parameters of Reed, we note that nothing in the Reed opinion causes us to believe that the court would not have allowed Mr. Reed to be held liable if he had traded in the stock of the other company to the merger, that is, the company for which his father was not a fiduciary. Indeed the court in Reed stated that "it does not matter for purposes of assessing liability whether the recipient of the information is actually trading in the securities issued by the source of the information." Id. at 700. Furthermore, Mrs. Lenfest told her son to trade in either TCI or Liberty. To say that if Chase Lenfest had bought Liberty stock Mrs. Lenfest would be liable, but that since he fortuitously bought TCI stock she is not liable, even though both companies were on the brink of merger, is to exhort form over substance. Either way, Mrs. Lenfest could be found by a jury to have decided to use the material information she received from her husband to her benefit. Accordingly, we hold the misappropriation theory could support extending liability for Mrs. Lenfest's actions and summary judgment is denied.
An Appropriate Order follows.
AND NOW, this 23rd day of December, 1996, upon consideration of Defendant Marguerite Lenfest's Summary Judgment Motion, and the responses thereto, Defendant's motion is hereby DENIED.
BY THE COURT:
J. Curtis Joyner, J.