The opinion of the court was delivered by: Juan R. Sánchez, J.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In this insider trading case, the Securities and Exchange Commission (SEC) asks this Court to find Frederick W. Anton, III, as Chairman of PMA Capital Corporation's Board of Directors, unlawfully tipped material, nonpublic information about PMA to outsider David L. Johnson in violation of the securities laws.*fn1 Anton argues the SEC failed to prove he violated the securities laws because Johnson is not credible, and, at the time he spoke to Anton, Anton was not in possession of the information he is alleged to have known and disclosed. Because the SEC has not met its burden to show by a preponderance of the evidence that Anton made, and benefitted from, the alleged disclosure, this Court finds no violation of the securities laws.
In 2003, PMA Capital Corporation was an insurance holding company, publicly traded on the NASDAQ, with subsidiaries providing workers' compensation, disability, commercial property, and casualty insurance. PMA was engaged in two main businesses, the primary commercial insurance business known as PMA Insurance Group, and the reinsurance business known as PMA Re. Beginning in 2000 and continuing into 2003, PMA Re experienced a higher than expected number of reported claims from the companies it insured. As a result, in the years between 2000 and 2003, including the final quarter of 2002, PMA Re several times increased the amount of its loss reserves -- an estimate of future amounts needed to pay the reported and unreported insurance claims of the companies insured. On February 25, 2003, A.M. Best, the primary rating agency for the rating of insurance and reinsurance companies, reduced PMA's rating from A to A-minus.*fn2
Johnson, a retired former PMA executive, was a sophisticated investor who regularly followed PMA's stock price, reviewed the company's quarterly financial reports, and attended annual meetings. On October 22 or 23, 2003, Johnson read a Credit Suisse First Boston analyst report regarding PMA's financial condition, sent to him by John Webster, a retired long-time former PMA colleague. The report stated Credit Suisse had reduced its classification for PMA from "Neutral" to "Underperform." The report explained:
The current valuation of the stock reflects concern over the competitive position of the company, the adequacy of loss reserves, the company's capital position, and the A.M. Best rating downgrade. On February 25th, A.M. Best reduced the rating of PMA's reinsurance business from A to A-. In addition, the valuation also represents the fact that five of the company's last quarters have been disappointing. We remain wary of the need to further add to reserves. The second quarter 2003 was the third straight quarter that operating earnings were reduced by additions to reserves for earlier losses at PMA Re. In total, these additions to reserves were $65 million. Ex. 2.
Johnson subsequently called John W. Smithson, the President and CEO of PMA, for verification of the report. Johnson asked Smithson whether the report was "factual," N.T. 11/10/08, 108: 3, 8, and Smithson replied that it was, but added that the company was not always treated kindly by Credit Suisse. Smithson, whose testimony is credible, testified Johnson also asked how the company was doing, and Smithson said PMA would be reporting its third quarter earnings in the normal course and there would be more information available then. Then, between 10:00 a.m. and 11:00 a.m. on Friday, October 31, 2003, Johnson called Anton at his office.*fn3
That same day, following his conversation with Anton, Johnson sold 20,000 shares of PMA stock. On Sunday, November 2, 2003, Johnson advised his son and daughter to sell their shares of PMA stock. On the following Monday, November 3, 2003, Johnson sold an additional 20,000 shares. The shares were sold at an average price of $13.17. Johnson's daughter did not sell her shares, but his son sold his PMA stock on November 3, 2003. On the morning of November 4, 2003, PMA announced it would be increasing its loss reserves by about $150 million and planned to suspend dividends. PMA stock closed that day at $5.03 per share. Johnson was able to avoid a total loss of $325,305.*fn4 Johnson's son was able to avoid a loss of $56,028.
On September 7, 2005, the SEC filed a complaint against Johnson, alleging Johnson had committed insider trading by selling stock after obtaining insider information and prior to PMA's announcement regarding its loss reserves and dividends. Johnson settled the action with the SEC by paying a total of $786,449, including disgorgement of $381,334, the amount of losses he and his son avoided, prejudgment interest of $23,781, and a civil penalty of $381,334. Johnson was also permanently enjoined from further violations of the antifraud provisions of the federal securities laws.*fn5 On May 31, 2006, the SEC filed this action against Anton, alleging tipper liability for his disclosure to Johnson of the material, nonpublic information that PMA would be eliminating its dividend and that PMA Re would be increasing its loss reserves.
To determine what was disclosed during the conversation between Johnson and Anton on October 31, 2003, the only direct evidence before this Court are the testimonies of Johnson and Anton. Neither account of the conversation, however, is credible. Johnson's testimony regarding his October 31, 2003 conversation with Anton cannot be credited because of inconsistencies in his stated reasons for calling Anton. Johnson has provided three different reasons for calling Anton on October 31, 2003. Under direct examination in court, Johnson testified his primary reason for calling Anton was to tell him that Webster, a former colleague, was in the terminal stages of cancer. During cross examination, Johnson testified that at the time he spoke to Anton, Johnson had known about the condition of Webster's illness for several weeks, having spoken to Webster sometime in September of 2003. Johnson testified he and Anton then spoke about Halloween because it was a very important holiday for Anton. Johnson later testified, under direct examination, it had not been Webster's illness but Halloween that had prompted his call, explaining: "Mr. Anton really liked that holiday, so that's probably the reason I called him in the first place, it just happened to be one of his favorite holidays, and so we talked about that." N.T. 11/10/08, 74, 3-6. In explaining why Halloween was so important to Anton, Johnson testified Anton often hosted Halloween office parties where employees would bring their children in costumes. When Johnson was deposed by the SEC on March 10, 2005, however, Johnson did not mention Halloween. During that deposition, Johnson testified he called Anton because he had seen a negative report from Credit Suisse First Boston. Johnson explained how he had viewed the Credit Suisse report as follows:
It indicated that they felt because of the last several quarters that they had to strengthen reserves, they mentioned that, that they had been strengthening. They felt it would be further strengthening in the future. Also they indicated that the [A.M.]
Best rate . . . had been reduced in the company and they also mentioned the profits by quarter. The last seven quarters, I believe, had been profitable, two of the seven, and because of these things they had reduced the rating from a neutral to an under perform which is a sale.
N.T. 11/10/08, 118: 3-15. Johnson confirmed in court he had not stated during his deposition that he called Anton on ...