Second Circuit Upholds Insider Trading Claim for Unregistered Securities

more+
less-
more+
less-

The US Court of Appeals for the Second Circuit recently held that the duty of corporate insiders to either disclose material nonpublic information or abstain from trading applies to unregistered securities. The Second Circuit vacated a decision by the US District Court for the District of Connecticut dismissing an insider claim by a former minority shareholder of Xcelera Inc.

Plaintiff, Gloria Steginsky, was a minority shareholder in Xcelera who sold her shares in 2011 in response to a tender offer for $0.25 per share. Steginsky alleged that Xcelera insiders repurchased stock through a shell corporation without disclosing information about the company’s financial situation. According to the complaint, Xcelara’s common stock traded for as high as $110 per share on the American Stock Exchange in 2000, but by 2004 was down to about $1. Around that time, Xcelera insiders stopped making required filings with the Securities and Exchange Commission, which caused the company to be delisted. In April 2011, Steginsky sold over 100,000 shares after a tender offer by OFC Ltd., allegedly owned by the Xcelera insiders. The complaint alleged a breach of fiduciary duty and violations of the Exchange Act through market manipulation and insider trading. The District Court dismissed the insider trading claim, holding that the insiders had no duty to disclose information before trading because the rule does not apply to unregistered securities. 

The Second Circuit reversed, holding that the duty of corporate insiders to either disclose material inside information or to abstain from trading applies to unregistered securities. The court held that defendant insiders had no general affirmative duty to disclose, but could not trade the shares based on undisclosed material inside information they possessed. The court vacated the dismissal of the insider-trading claims and remanded to the District Court. 

Steginsky v. Xcelera Inc., Nos. 13-1327-cv, 13-1892-cv (2d Cir. Jan. 27, 2014).