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In re Oracle Corp. Derivative Litigation11/24/2004
gued that a constructive trust in favor of Cities Service should be placed on the defendant's trading profits. In response, the defendant claimed that he should not be liable to the company because his trading activities did not cause the company to suffer a loss - i.e., that the corporation could not recover unless it proved that it was damaged by the defendant's trading activity. This court, per Chancellor Harrington, rejected the defendant's argument and based its reasoning on principles of restitution. A fiduciary in the defendant's position, the court held, could not use corporate "information for his own personal gain." When that fiduciary breaches his duty not to use the corporation's confidential information for personal profit, the court held that the appropriate remedy was disgorgement of the ill-gotten gains to the corporation. In so ruling, the court relied on the Restatement of Restitution.
Since Brophy was decided, it has been cited frequently by the courts of this State. But the Brophy doctrine has, to my knowledge, never been applied by this court to support a final judgment awarding restitution to an issuer. It has, however, been cited as an important precedent by courts in other states, such as New York, which have adopted its teaching.
The parties in this case warmly disagree about the continued vitality of Brophy and the precise contours of a Brophy claim under Delaware law. For their part, Ellison and Henley contend that Brophy should no longer form part of Delaware's common law of corporations. Brophy and its key progeny in New York, they note, were decided before the emergence of a potent federal securities law regime designed to discourage improper trading by corporate insiders. A comprehensive array of federal statutes now addresses insider trading and subjects corporate insiders to: 1) the possibility of criminal convictions, 2) the disgorgement of trading profits to sellers or buyers who suffer losses, and 3) civil penalties to the Treasury of the United States in the amount of three times their illicit trading profits. As a result, the defendants contend that Brophy is no longer a necessary or appropriate part of our common law. Brophy's perpetuation, defendants argue, risks subjecting corporate insiders to duplicative liability, by having this court heap a restitution award to their companies on top of disgorgement to traders and the payment of a multiple of their trading profits to the Treasury of the United States. Moreover, it increases litigation costs unnecessarily by encouraging duplicative state law suits whose deterrent value is not worth the cost, due to the strong federal disincentive to the wrongful exploitation of corporate information.
If Brophy survives, the defendants contend that it must be interpreted as a context-specific application of loyalty principles. Thus, a Brophy claim can be sustained only if the trading insider can be said to have engaged in conscious wrongdoing by executing trades, in whole or in part, because the insider knowingly possessed material, nonpublic information. This reading of Brophy, the defendants contend, is consistent with that articulated in all the Delaware cases that apply Brophy.
The plaintiffs strongly disagree with this line of reasoning. They contend that Brophy fulfills a distinct purpose by providing corporations themselves with a potent remedy against the improper use of company information. The federal regime generates monetary remedies that go to injured buyers or sellers or to the U.S. government, but not the corporation whose information has been usurped by a faithless fiduciary and whose business has been disrupted by the tumult and expense that often accompanies inside trader cases
Page 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Delaware Personal Injury Attorneys
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