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In re Oracle Corp. Derivative Litigation11/24/2004
involving top fiduciaries. Thus, the subsequent emergence of a federal system addressing insider trading should not, say the plaintiffs, lead this court to abandon the well-established precedent of Brophy, a precedent that is grounded in settled principles of restitution and that provides a simple-to-calculate remedy.
Indeed, the plaintiffs argue that Brophy should be strengthened and not abandoned. Rather than simply ordering disgorgement when a fiduciary has knowingly traded on inside information, this court should treat insider trading as a self-dealing transaction and require the fiduciary to prove that his trades were entirely fair to the corporation. If the court concludes that the insider had material information at the time of his trades, the insider should be required to disgorge his trading profits to the corporation regardless of whether he acted with scienter, in the sense that he traded, in whole or in part, because he knowingly possessed material, inside information.
In the pages that follow, I address these arguments in the following manner. Initially, I determine whether summary judgment is appropriate even if Brophy remains good law. In the course of that exercise, I first outline what I find to be the elements of a Brophy claim. I then evaluate the sufficiency of the plaintiffs' claim by comparing those elements to the factual record submitted to me.
Because that analysis results in the conclusion that the defendants are entitled to summary judgment, I decline their invitation for me to conclude that Brophy is an outdated precedent that ought to be abandoned. The important policy question the defendants have raised can be left to a later case in which the answer to that question is outcome- determinative. Because the defendants prevail under a reasoned application of Brophy, it is unnecessary to make a broad ruling with sweeping effect.
V. The Elements Of A Brophy Claim
Much of the plaintiffs' argument, as will become clear, is grounded in the notion that a corporate insider is strictly liable to return any trading profits if: 1) the insider possessed information that cast some doubt on the company's ability to meet its public earnings and revenues projections, and 2) the company later failed to meet those projections. That is so, the thrust of the plaintiffs' submissions suggest, even if the insider subjectively believed the company would meet its projections and even if the company's best estimate of its performance suggested that the company would meet, exceed, or fall immaterially short of the projections.
The policy basis for this argument is not particularly clear. I suppose it rests in the notion that corporate insiders ought to be extremely scrupulous about trading in their company's shares. Of course, given the possibility for criminal liability for insider trading, a disgorgement remedy to the trading public, and a treble-profits (or loss avoided) disgorgement civil penalty to the United States Treasury at the instance of the SEC - not to mention possible liability under a traditional application of Brophy and the threat of reputational self-destruction - it is by no means obvious that the existing legal and ethical regime less than optimally deters the wrongful exploitation of inside information by corporate fiduciaries.
To go down the road the plaintiffs would have Delaware law travel would be to recklessly risk upsetting carefully balanced policy judgments that undergird our law and federal law. There are many reasons why that is a probable result. Here, I note only a few. I begin with the idea that many sophisticated commentators believe that it is a good idea that corporate insiders own company
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