Until earlier this month, state law insider trading claims, known as “Brophy” claims, after the seminal case Brophy v. Cities Serv., 70 A.2d 5 (Del. Ch. 1949), if not dead, were on life support. Defense arguments that Brophy claims are outdated and redundant due to the drastic changes in federal securities laws that have occurred in the 60-plus years since Brophy was decided had found a receptive ear. Further, a decision in Delaware Chancery Court on the viability of Brophy claims, while finding they still existed, removed one of their key components. In particular, the Delaware Chancery Court stated that in most circumstances, disgorgement of the profits from insider trading was not proper. On June 20, however, the Delaware Supreme Court resuscitated Brophy and re-established its traditional interpretation.
The Delaware Chancery Court began to consider whether Brophy claims were still valid in 2004. That year, Chancellor Leo Strine issued his now famous ruling in In re Oracle, 867 A.2d 904 (Del. Ch. 2004). The plaintiffs in Oracle alleged that the company’s CEO and CFO sold large amounts of stock while knowing that the company would not meet its earnings and revenue projections. Defendants than moved for summary judgment, arguing (1) that Brophy was no longer good law and (2) even if it was, the executives did not have any knowledge of material inside information. In particular, the defendants argued that Brophy liability would be duplicative of any penalty the insiders would have to pay under the federal securities law and it unnecessarily encouraged duplicative state law suits that had little additional deterrent effect in light of the federal laws. Strine, however, did not rule on the validity of Brophy. Instead, he found that the insiders did not posses any insider information when they sold their stock, and decided that the policy consideration behind whether to apply Brophy could be “left to a later case in which the answer to that question is outcome-determinative.” It would be six years before the chancery court took up the issue directly.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.
For questions call 1-877-256-2472 or contact us at [email protected]
