Omni Inc. owned several radio and TV stations in the Midwest and South. Morton w

Question

Omni Inc. owned several radio and TV stations in the Midwest and South. Morton was a Wall Street financier with a reputation as a "takeover artist". He decided to take over Omni Inc. while the stock price was (in his opinion) low. On 1 April 2014 he contacted Johnson (the CEO of Omni) to discuss "an extremely important matter". At the meeting (held on 3 April 2014) he proposed a "friendly all-cash takeover" in which Morton Investment Corp. would acquire all of Omni at a price of $10 per share.   He also stated that if this offer were rejected he intended to launch a hostile tender offer on 10 April 2014 so that he could take control of the company.   Johnson promised to give Morton an answer after consulting with the Omni board. The board met on 5 April 2014 and, at Johnson's urging, decided to fight the takeover. These meetings were kept secret.

Lana was Johnson's executive secretary. She had attended the Omni board meeting. On 6 April 2014 she called her former boyfriend Virgil, who owned 5000 shares of Omni stock. She told him that "Omni is going down the tubes – it is headed for bankruptcy" but that for "old time’s sake" she would buy his stock for $7 per share. Since he was in financial trouble, he sold her his shares that night at a price of $7 per share.

Dilma was a Omni director; she attended the meeting on 5 April 2014. She did not buy or sell any stock, but she did phone her friend Forster on 7 April 2014 to tell him about Morton's plans. Forster then bought 10,000 shares from his associate Hamilton at a price of $8 each.

On 10 April 2014 Morton announced a tender offer for 51% of Omni's stock at $10 per share. The next day the market price rose from $7 per share to $9.

Lance was an attorney who worked for the law firm that represented Morton. He was assigned to prepare the legal paperwork for the tender offer; he knew all details concerning the attempt by Morton to acquire control of Omni. On 9 April 2014 Lance purchased Omni stock through Landon, his broker at Big Time Securities. Lance told Landon about the upcoming attempt by Morton to take control of Omni. Landon also purchased Omni stock on 9 April 2014. On 12 April 2014 both Lance and Landon sold their Omni stock. Lance made a profit of $600,000 from his purchase and sale; Larry made a profit of $200,000.

Analinda had been a director of Omni since 2010; she attended the Board meeting on 3 April 2014. She purchased 10,000 shares of Omni stock on 5 March 2012 at a price of $10 per share. On 30 December 2012 Analinda purchased 1000 additional shares of Omni stock at a price of $11 per share. On 12 April 2013 Analinda sold 5000 shares of TNA stock at a price of $12 per share.

Question 1) The SEC during an investigation learned of the purchases of Omni stock made by Lance and Landon. Could it successfully bring a lawsuit requiring either of them to pay any damages in connection with their purchase of Omni shares? Explain.

Explanation / Answer

1. Yes, in my opinion, SEC could successfully bring lawsuit against both Lance and Landon as both of them are guilty of insider trading.

Insider trading is making transactions (either purchase or sell) on a stock or share by people have access to nonpublic information about the company and its shares and stocks. The information has to be material. When the information is still nonpublic and trade is done, then such trading is illegal.

In this case, both Lance and Landon made their initial trades of buying the stocks on 9th April. However, the tender offer for the takeover was announced on 10th April. Thus, Lance and Landon made their trades when the information was not made public. Thus they had a direct advantage over other investors who had no such access to confidential information.

Lance is the attorney of Morton and thus can be included in the category of "employees of law, banking and brokerage and printing firms who were given such information to provide services". Landon will be included in the category of "other persons who misappropriated and took advantage of confidential information".

Thus, SEC can successfully bring a lawsuit requiring both of them to pay any damages in connection with their purchase of Omni shares.

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