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In re Oracle Corp. Derivative Litigation11/24/2004
l law does, which is that insider trading claims depend importantly on proof that the selling defendants acted with scienter.
Distilled to its essence, therefore, a plaintiff seeking to prevail on a Brophy claim ultimately must show that: 1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information. To anyone familiar with federal insider trading law, these elements will not look unusual as they more or less track the key requirements to recover against an insider under federal law.
The basic elements, as might be expected, are easier to state than to apply. The federal courts have struggled to shape the basic concepts of materiality and scienter into standards that trial courts can apply to decide actual cases. To that ongoing endeavor, I now turn, beginning with what the concept of materiality means in the context of this case.
VI. The Materiality Of Intraquarter Data
The definition of materiality used by Delaware courts is identical to that used by federal courts. For information to be material, there must be a "substantial likelihood" that the nonpublic fact "would have assumed actual significance in the deliberations" of a person deciding whether to buy, sell, vote, or tender stock. In other words, the nonpublic information must be of a magnitude that it would, upon disclosure, have "significantly altered the `total mix' of information" in the marketplace."
Materiality is intrinsically a contextual concept that requires consideration of the nature of the supposedly material information that was not public knowledge and of the other information that was known to the market. Here, what is contextually important is that the plaintiffs are arguing that intraquarter operating results, projections, and Pipeline estimates in Henley's and Ellison's possession were material because that information was inconsistent with the Market Estimates Oracle had released on December 14, 2000.
In determining whether the information that Henley and Ellison had access to when they decided to trade is material, it is important to bear in mind the federal disclosure policies that address intraquarter financial information. An experienced securities practitioner described these policies succinctly and well in academic commentary:
Issuers ordinarily do not have to disclose operating results as a quarter progresses - for example, declining sales or reverse trends, changes in product mix or margins, delays in new product introductions, etc. - unless it is necessary to correct a prior statement inaccurate at the time it was made. Financial information is normally disclosed quarterly - as is a company's views of known trends and uncertainties - in the MD&A;section of its Forms 10-K and 10-Q. No rule requires the routine reporting of mere changes, or anticipated changes, in operating results during a quarter. A number of cases have said that there is no duty to make intraquarter disclosures, even if results are below a company's own, and the market's, expectations.
Strong policy reasons support this rule. It takes time for a company to generate accurate and reliable information regarding current performance, to analyze the information meaningfully. Requiring disclosure of such information is therefore tantamount to requiring disclosure of internal projections that will constantly change as the quarter progresses. That information is inherently transitory and fragmentary, even if it is in some metaphysical sense `current' or `unknown.'
Congre
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