Fill and Sign the Jury Instruction 441 Rule 10b 5a Device Scheme or Artifice to Defraud Insider Trading Form

4.1 Securities Act Rule 10b-5(a) 17 C.F.R. § 240.10b-5(a) Device, Scheme Or Artifice To Defraud Insider Trading The Plaintiff's [first] claim in this case is asserted under the Securities Exchange Act. The Securities Exchange Act is a federal statute that, among other things, allows the Securities Exchange Commission to promulgate, in the public interest or for the protection of investors, rules and regulations prohibiting certain conduct in the purchase or sale of securities. Among such regulations is Rule 10b-5(a) which makes it unlawful for anyone to employ any device, scheme, or artifice to defraud in connection with the purchase or sale of any security. A “security” is commonly defined as a stock, bond, note, convertible debenture, warrant or other document representing a share of stock in a company or a debt owed by a company. In order to prevail on the claim under Rule 10b-5(a), the Plaintiff must prove each of the following facts by a preponderance of the evidence: First: That the Defendant used an "instrumentality of interstate commerce" [a facility of a national securities exchange] in connection with the securities transaction involved in the case; Second: That the Defendant's conduct in connection with such transaction violated Rule 10b-5(a) as hereafter explained; Third: That the Defendant acted "knowingly," as that term is defined in these instructions; Fourth: That the Plaintiff "justifiably relied" upon the Defendant's conduct as that term is defined in these instructions; and Fifth: That the Plaintiff suffered damages as a proximate result of Defendant's wrongful conduct. [In the verdict form that I will explain in a moment, you will be asked to answer a series of questions concerning each of these factual issues.] With regard to the first of these facts - - that an "instrumentality of interstate commerce" was used in some phase of the transaction - - the term "instrumentality of interstate commerce" means, for example, the use of the mails or the telephone or some other form of electronic communication [or a facility of a national securities exchange]. The second fact that the Plaintiff must prove is that the Defendant engaged in conduct that violated Rule 10b-5(a) which, as said before, makes it unlawful for anyone to employ any device, scheme or artifice to defraud in connection with the purchase or sale of a security. In this instance the Plaintiff claims that the Defendant employed the fraudulent “device” of engaging in “insider trading.” [Under the “classical theory” of insider trading, Rule 10b-5(a) is violated when a corporate insider trades in the securities of [his] [her] corporation on the basis of material, non-public information. “Material” information is any information that would be important for a reasonable investor to know in making the decision to buy or sell a security. Non-public information is that information which is not available to the public. Corporate “insiders” are the officers, directors, and other permanent employees of the corporation. Additionally, accountants, attorneys, consultants and others who temporarily become fiduciaries of the corporation are also corporate insiders. Because corporate insiders have a relationship of trust and confidence with the shareholders of the corporation, they have a duty to abstain from trading shares of the corporation’s stock based upon material and confidential information they have obtained by reason of their positions with the corporation. If an insider wishes to trade in [his] [her] corporation’s securities [he] [she] must first disclose that information to the public. In order to prove that the Defendant violated Rule 10b-5(a), the Plaintiff must prove by a preponderance of the evidence that the Defendant actually used material, non-public information and did not disclose that information to the public before trading. Mere possession of material, non-public information without using it in the securities transaction is not sufficient to establish a 10b- 5(a) violation.] [Under the “misappropriation theory” of insider trading, a person commits fraud in connection with a securities transaction, and thus violates Rule 10b-5(a), when [he] [she] misappropriates material and confidential information for securities trading purposes in breach of a duty owed to the source of the information. Under that theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities in breach of a duty of loyalty and confidentiality defrauds the principal of the exclusive use of that information. In order to prove that the Defendant violated Rule 10b- 5(a), Plaintiff must show, by a preponderance of the evidence, that Defendant misappropriated information from someone to whom he or she owed a fiduciary duty, and that the Defendant then traded on that information.] The third fact that the Plaintiff must prove under Rule 10b- 5(a) is that the Defendant acted "knowingly." It is not enough to show that the Defendant acted accidentally or merely made a mistake or even that the Defendant was negligent. Rather, it must be shown that the Defendant acted with a mental intent to deceive, manipulate or defraud; that the Defendant deliberately used material, confidential information in order to obtain an unfair advantage. The fourth essential part of the Plaintiff's claim under Rule 10b-5(a) is the requirement of proof that the Plaintiff "relied" upon the Defendant’s alleged fraud and was “justified” in doing so. [If you find that the Plaintiff did not rely directly upon any fraudulent conduct by the Defendant but relied instead on the integrity and regularity of the market in which the securities were traded so that, but for the fraud or deception of the Defendant the security would not have been marketed at the same price that finding would satisfy the Plaintiff’s obligation of proving justifiable reliance upon the Defendant’s conduct. If you find, in other words, that the Defendant knowingly traded upon secret and material information of the kind normally used and relied upon by those engaged in the purchase or sale of securities in an established market, and that the Plaintiff relied upon the integrity and regularity of the market itself, then the Defendant may be held liable even though the Plaintiff did not directly rely upon the specific conduct of the Defendant.] The fifth and last essential part of the Plaintiff's claim under Rule 10b-5(a) is the requirement that the Plaintiff prove injury or damage to the Plaintiff as a proximate result of the Defendant’s alleged fraud. For damage to be the proximate result of a fraud, the Plaintiff does not have to prove that the fraud was the only cause of the injury or damage. Rather, the Plaintiff must prove that the fraud was a substantial or significant contributing cause, so that, except for the fraud such damage would not have occurred. If you find for the Plaintiff on the claim under Rule 10b-5(a), you will then consider the issue of the amount of money damages to be awarded to the Plaintiff. In considering the issue of the Plaintiff’s damages, you are instructed that you should assess the amount you find to be justified by a preponderance of the evidence as full, just and reasonable compensation for all of the Plaintiff’s damages, no more and no less. Compensatory damages are not allowed as punishment and must not be imposed or increased to penalize the Defendant. Also, compensatory damages must not be based on speculation or guesswork because it is only actual damages that are recoverable. You should consider the following elements of damage, to the extent you find them proved by a preponderance of the evidence, and no others: (a) [Describe Plaintiff’s theory of recoverable compensatory or economic damages] (b) Punitive damages, if any (as explained in the Court’s instructions) 4.1 Securities Act Rule 10b-5(a) 17 C.F.R. § 240.10b-5(a) Device, Scheme Or Artifice To Defraud Insider Trading SPECIAL INTERROGATORIES TO THE JURY Do you find from a preponderance of the evidence: 1. That the Defendant used an “instrumentality of interstate commerce” in connection with the securities transaction involved in this case? Answer Yes or No 2. That the Defendant’s conduct in connection with such transaction violated Rule 10b-5(a) (as explained in the Court’s instructions)? Answer Yes or No 3. That the Defendant acted “knowingly” (as that term is defined in the Court’s instructions)? Answer Yes or No 4. That the Plaintiff “justifiably relied” upon the Defendant’s conduct (as that term is defined in the Court’s instructions)? Answer Yes or No 5. That the Plaintiff suffered damages as a proximate result of the Defendant’s wrongful conduct? Answer Yes or No [Note: If you answered No to any of the preceding questions you need not consider the remaining question.] 6. That the Plaintiff should be awarded $ in compensatory damages. SO SAY WE ALL. Foreperson DATED: ANNOTATIONS AND COMMENTS 240.10b(5)a Employment of manipulative and deceptive devices. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Insider Trading, Classical Theor y: The language of this charge comes directly from the leading cases on insider trading - - United States v. O’Hagan, 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724, 741 (1997) and Chiarella v. United States, 445 U.S. 222, 228 (1980). In O’Hagan the Supreme Court held that trading on material non-public information is a “device” within the meaning of § 10(b) of the Securities Exchange Act and Rule 10b-5. Id. at 2209-10. Additionally, the Eleventh Circuit has held that mere possession of material, non-public information is insufficient to establish a 10b-5 violation. Rather, Plaintiff must show that Defendant actually used that information in trading with an intent to defraud. S.E.C. v. Adler, 137 F.3d 1325, 1337 (11th Cir. 1998). Insider Trading, Misappropriation Theor y: O’Hagan answered the question of whether someone in possession of inside information can violate 10b-5 when he trades in another company’s stock - - traditional insider trading occurs when the insider trades in his own company’s stock and is derived from breach of fiduciary duty concepts. The Court held that trading in any securities based upon information as a result of a fiduciary duty violates 10b-5. Under O’Hagan, the Defendant violates Rule 10b-5 when he trades on any information obtained in violation of a fiduciary duty. Probably the most common application of misappropriation theory occurs where corporate insiders know that their company is about to launch a takeover of another company. Under the classical theory, they cannot trade in shares of their own company and under the misappropriation theory they cannot trade in the target’s shares.