SEC Rule 10b-5. Grand Metropolitan PLC (Grand Met) planned to make a tender offer as part of an attempted takeover of the Pillsbury Company. Grand Met hired Robert Falbo, an independent contractor, to complete electrical work as part of security

Question

renovations to its offices to prevent leaks of information concerning the planned tender offer. Falbo was given a master key to access the executive offices. When an executive secretary told Falbo that a takeover was brewing, he used his key to access the offices and eavesdrop on conversations to learn that Pillsbury was the target. Falbo bought thousands of shares of Pillsbury stock for less than $40 per share. Within two months, Grand Met made an offer for all outstanding Pillsbury stock at $60 per share and ultimately paid up to $66 per share. Falbo made over $165,000 in profit. The Securities and Exchange Commission (SEC) filed a suit in a federal district court against Falbo and others for alleged violations of, among other things, SEC Rule 10b-5. Under what theory might Falbo be liable? Do the circumstances of this case meet all of the requirements for liability under that theory? Explain.

Answer 1

SEC Rule 10b-5
The court held that Falbo was liable under the misappropriation theory. Grand Met placed Falbo in a position of trust and confidence, which, like the restrictions of a fiduciary relationship, prohibited him from taking advantage of the position for his personal gain. Despite this responsibility, "he used for his personal benefit information obtained during the course of this association." The key that Falbo had represented "property given by Grand Met to Falbo to enable him to serve Grand Met's interests" (completing electrical work for the renovations). "Grand Met relied on Falbo to use that access in a manner consistent with Grand Met's interests." Instead, Falbo used this access to obtain confidential information, "which rightfully belonged exclusively to Grand Met's shareholders." When he used this information for his personal gain, he violated his duty to Grand Met. The court added that it "recognize[d] the irony of Falbo's actions: Falbo misappropriated information about the Pillsbury transaction that he obtained while doing work for Grand Met that was intended to ensure the security of that very information."