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Securities & Exchange Commission v. Carroll

United States District Court, W.D. Kentucky

March 24, 2014


Decided: March 21, 2014.

Page 762

For Securities And Exchange Commission, Plaintiff: Daniel J. Hayes, James A. Davidson, Jason Andrew Schmidt, U.S. Securities & Exchange Commission -Chicago, Chicago , IL; William F. Campbell, U.S. Attorney Office - Louisville, Louisville , KY.

For John P. Monroe, Defendant: John J. Muldoon , III, Muldoon & Muldoon, LLC, Chicago , IL.

For Stephen Somers, Defendant: Kent Wicker, Lesley A.S. Bilby, LEAD ATTORNEYS, Dressman Benzinger LaVelle PSC, Louisville , KY; John M. Clifford, Clifford & Garde, LLP, Washington , DC; Laurence Storch, Pollack & Storch, Washtington , DC; Stanley Sporkin, Washington , DC.


Page 763


John G. Heyburn II, United States District Judge.

The Securities and Exchange Commission (SEC) brought this civil action alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) by Defendants Patrick M. Carroll, James P. Carroll, William T. Carroll, David Mark Calcutt, Christopher T. Calcutt, David A. Stitt, John Monroe, and Stephen Somers. Defendants traded in the securities of Steel Technologies, Inc. (STTX) in the month before the February 28, 2007 public announcement of its acquisition by Mitsui & Co. USA Inc. (Mitsui). The six Defendants who worked for STTX have settled; the remaining two Defendants are David Stitt's alleged tippee, John Monroe, and Monroe's alleged tippee, Stephen Somers.

Defendant Somers moved for summary judgment on the SEC's claim against him. No particular case or precedent is dispositive here. In the end, the resolution turns upon what permissible inferences a reasonable jury might conclude from the evidence. For the reasons that follow, the Court denies the motion.


The Court will now briefly summarize the facts relevant to the SEC's claim against Somers. STTX processes flat-rolled steel to specific requirements for customers in steel-consuming industries. STTX is headquartered in Louisville, Kentucky and was traded on the NASDAQ at all relevant times. Mitsui is the largest

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overseas subsidiary of Mitsui & Co., Ltd., headquartered in Tokyo, Japan.

There are three primary individuals involved in the SEC's claim against Somers. The alleged insider and initial tipper is David Stitt, who was General Manager of Sales for STTX's Northeast Region and based out of Pennsylvania at all relevant times. Stitt's alleged tippee and Somers's alleged tipper is John Monroe, a Pennsylvania car sales manager. Monroe was friends with both Stitt and Somers. Somers, the alleged remote tippee, co-owns Somers Brothers Capital, LLC, a commodity trading advisor and commodity pool operator that he operated in Pennsylvania.

The relevant events occurred in the week prior to STTX's public announcement of its acquisition by Mitsui. Stitt reported to STTX's Senior VP of Sales, Brad Goranson, and President and COO, Michael Carroll, both of whom knew about STTX's acquisition discussions with Mitsui before Stitt traded. During February 2007, Goranson and Stitt communicated often, sometimes daily. On Friday, February 23, Stitt was told that he must attend a special meeting at STTX's Louisville headquarters on Monday, February 26, either by Goranson or Fran Cooley Adams, Executive Assistant to Michael Carroll. Stitt claims that he was not told the purpose of the meeting, and both Goranson and Adams deny telling Stitt about the forthcoming acquisition. Never before had Stitt been told to fly to Louisville for a meeting on such short notice without also being told the purpose of the meeting. According to Goranson, the purpose of the meeting was to inform company officers about Mitsui's planned acquisition of STTX.

On February 23, Stitt had an unprecedented 19 telephone calls with STTX's headquarters, five of which occurred between 3:58p.m. and 4:22p.m. During one of these calls, Stitt questioned Executive Assistant Julie DuChane about the purpose of the special meeting. DuChane possessed information about STTX's acquisition that she received from Adams but denied providing it to Stitt. At the end of the day, Stitt purchased almost $40,000 of STTX stock, increasing his position in company stock from 2% to 17% of his overall 401(k) portfolio.

On Sunday, February 25 and Monday, February 26, there was a series of phone calls. On Sunday at 1:40p.m., Stitt called his parents' condo and had a 10-minute conversation. At 1:57p.m., Stitt called Monroe's cell phone and had a 14-minute conversation. At 2:23p.m., Monroe called Somers's cell phone and had an 18-minute conversation. The same minute Monroe's conversation with Somers ended, Monroe called his financial adviser Mr. Waldron.

On Monday, February 26 at 10:20a.m., Monroe called Somers at work and had a 10-minute conversation. At 10:36a.m., Monroe called Waldron again and had an 8-minute conversation. Finally, at 10:45a.m., Monroe called Stitt.

At 3:48p.m. that day, Somers bought 2,000 shares of STTX stock. At the time he traded the stock, Somers knew that Stitt worked for STTX, that STTX was publicly traded, and that a duty of confidentiality generally applied to nonpublic information about acquisitions. In addition, Somers did not know of anyone else that Monroe knew of who worked at STTX.

At 4:00p.m., the Mitsui acquisition plan was announced to STTX senior sales personnel, including Stitt, at the meeting in Louisville, Kentucky. Meeting attendees signed the Bluegrass Confidentiality Agreement. On February 28, the acquisition was publicly announced. Between speaking with Stitt and STTX's public acquisition

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announcement, both Monroe and Stitt's 75-year-old mother purchased STTX stock. Somers sold his STTX stock 8 days after purchasing it, generating a profit of approximately $20,000.

The content of the phone calls between the parties is disputed. Because of the significantly disparate characterizations of these telephone calls, the Court will quote deposition testimony directly. In his deposition, Monroe was asked what led to his decision to purchase 3,000 shares of STTX stock. He replied: " In a conversation that I had with David Stitt, the week of the 20th . . . he was on a hunch that there was a possibility of Steel Technologies buying somebody or somebody buying them . . . ." When Monroe was asked if Stitt told Monroe the basis of his hunch, Monroe replied, " He was scheduled to travel out there for a meeting." When Monroe was asked if Stitt told Monroe what he thought the meeting was about, Monroe replied, " He thought it could be . . . one, he could be getting canned, maybe they were buying something, maybe they were getting bought. One of the three, guessing, speculating."

Other deposition evidence pertains to Monroe and Somers's conversation. Both men admit to discussing STTX. When Monroe was asked if he passed on the information he got from Stitt to Somers prior to February 26, Monroe replied, " Yes." When Somers was asked what he remembered about their conversation, Somers replied, " . . . Monroe made mention of Steel Technologies and said something to the effect that: Take a look at Steel Technologies. There might be something going on at the company." Somers also said that, to him, the fact that " something was going on" with STTX, given Somers's background, meant that " there's something that's going to impact the share price."


Somers moves for summary judgment under Federal Rule of Civil Procedure 56, which entitles a party to summary judgment where " the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The movant must show that there is no genuine issue as to any material fact or that the nonmoving party cannot prove an essential element of its case for which it has the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once accomplished, the nonmoving party can overcome summary judgment by controverting the movant's argument with specific facts. Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The Court need not accept unsupported or conclusory allegations. Bell v. Ohio State Univ., 351 F.3d 240, ...

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