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Keith Kim got himself booted out of his club for it and allegedly lied to the Securities and Exchange Commission about what he did. But that doesn’t mean he’s guilty. Even if he admits that he traded in the stock of a company after learning of its pending merger through an exclusive club for business executives, that doesn’t mean he should go to jail. Or does it? Kim was indicted earlier this year for insider trading, but his lawyer maintains that the government is casting its net too wide. The way Kim learned of the merger, argues O’Melveny & Myers partner Daniel Bookin, cannot trigger an insider trading case. Last week, Judge Charles Breyer of the U.S. District Court for the Northern District of California seemed ready to agree. He also said that in his time on the bench, “I haven’t come across a criminal case that I thought was really interesting until this one.” Perhaps the case is so fascinating because what seems patently illegal — taking inside information learned in a confidential setting and profiting from it — may not be, at least according to Bookin and indications from Breyer. Kim was charged under the misappropriation theory of insider trading, which holds liable those who base a securities trade on information that was obtained lawfully, but used in breach of a duty of confidence owed to the source of the information. But to prove guilt under the misappropriation theory, courts have held that the trader must have a “fiduciary relationship,” or something similar to it, with the source. Here, the government alleges that even though Kim and the tipper had no special individualized relationship, their association through the Young President’s Organization — a club for CEOs under the age of 50 whose members vow secrecy — can form the bedrock of an insider trading case. “When Kim learned of the pending merger from another member, he stole the information, traded in securities for his own profit, and tipped his business partner and relatives so they could trade and profit,” wrote Assistant U.S. Attorney Patrick Robbins in court briefs. “Kim summarily concludes that these allegations do not describe a breach of an accepted fiduciary duty. In fact, they do, under black letter law.” But Bookin argues that the letter of the law is not as black as Robbins makes it out to be. “Because the relationship of equal peer members of a private club lacks the inherent qualities of a fiduciary relationship or its functional equivalent, Kim’s alleged conduct cannot give rise to insider trading liability under the misappropriation theory,” Bookin wrote in court briefs urging Breyer to dismiss much of the indictment. The case essentially turns on the definition of the phrase “fiduciary relationship.” And that is where Breyer and Robbins seemed to part ways during oral arguments Wednesday. “There’s not a formal fiduciary relationship,” Robbins conceded. But, he called it “fiduciary-like.” But after delving into Black’s Law Dictionary, Breyer indicated that for a fiduciary relationship to exist, one party must exert some sort of control or influence over the other. On that point, Breyer seemed to have trouble buying Robbins’ argument that the point of the YPO is for members to influence each other through the exchange of confidential — even material and non-public — information. “The only reason these people get together is to exchange highly [sensitive] information,” which members then apply to their own companies, Robbins said. That, he argued, constitutes influence. Breyer was skeptical, pointing to his own membership in professional organizations. The reason for his attendance, Breyer said, “is to learn what’s going on … . It’s not to influence somebody — it’s to exchange views.” Breyer also offered a tongue-in-cheek hypothetical, comparing the YPO to an est seminar. “Would Werner Erhard create 10(b)5 problems?” Breyer asked. “You’re going to cover half the world with this situation.” At the time of the trades, Kim was seen as something of a savior in Oakland, Calif., where he temporarily rescued potato chip-maker Granny Goose Inc. from the brink of collapse (it eventually filed for bankruptcy, in 2000). While there, Kim joined the YPO, a national group with chapters across the country. As a condition of membership, all members sign an agreement that what is said in the club stays in the club. During a 1999 retreat, Kim learned that another member, Gianluca Rattazzi, CEO of Meridian Data Inc., was unable to attend because his company was in merger talks. Kim did not learn the information directly from Rattazzi, and Rattazzi has not been charged. In March 1999, he bought stock in Meridian, which he sold shortly after it merged with Quantum Corp. Kim cleared $830,000 on an initial $580,000 investment, for a 143 percent profit. His trades made the SEC suspicious. When investigators contacted him, Kim allegedly lied, telling the agency he did not know why Rattazzi hadn’t attended the retreat and that he bought the stock based on a Wall Street Journal article. He was indicted in January. Typically, misappropriation cases involve a fiduciary breach between an employer and employee. Other cases have involved a father and son, a psychiatrist and patient, or, in the only case to have reached the U.S. Supreme Court, a lawyer whose firm was working on a deal. Even a reporter who tipped off the contents of an influential, but unpublished, article has been found guilty. But in the relatively few misappropriation criminal cases to have been brought, courts have struggled to establish clear rules since each case depends on a fact-specific relationship between the source and the trader. Last year, the SEC enacted rule 10(b)5-2 to clear up confusion among courts. It states that anyone who receives information when there is either an explicit relationship of confidence, or obtains the information from someone with whom there is a “history, pattern or practice of sharing confidences,” could be liable for insider trading. Bookin admits that under the new rule Kim’s goose would be cooked. Although the government argues that case law is on its side and that the new rule doesn’t matter, Bookin is trying to show that Kim could not have known his trades were illegal. “The SEC — undoubtedly comprised of persons of at least ordinary intelligence — has confirmed that the law in this area is ‘unsettled’ in March 1999,” Bookin wrote. In court, Breyer picked up on that argument. “It’s not: Could it fit, could [the indictment] fit? We’re talking about: Was there notice that it was going to fit?” Breyer said. Breyer said he will likely rule before Thanksgiving.

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