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S.E.C. v. TRUONG

April 12, 2000

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
V.
HAHN TRUONG, HIEU TRUONG, HEN TRUONG, NINA VINH, MIKE PIRBAZARI, AND CHRISTOPHER NGUYEN, DEFENDANTS.



The opinion of the court was delivered by: Spencer Williams, District Judge.

  ORDER RE: DEFENDANT'S MOTIONS FOR SUMMARY JUDGEMENT

I. INTRODUCTION

Defendants Hanh Truong ("Hahn"), Hieu Truong ("Hieu"), Hen Truong ("Hen"), and Christopher Nguyen ("Nguyen") move for summary judgment pursuant to Federal Rule of Civil Procedure 56 in this civil enforcement proceeding by the Securities and Exchange Commission ("SEC") for violations of federal securities laws prohibiting insider trading.*fn1

The question presented in these motions is whether the SEC has presented sufficient evidence of insider trading to warrant moving forward with a jury trial as to each Defendant. Defendants argue that the SEC has not presented sufficient probative evidence and is basing its charges on "mere suspicions." The SEC concedes that the evidence is not overwhelming, but urges that the evidence is more than sufficient for a reasonable jury to infer that Defendants possessed and traded upon material non-public information.

Having considered the arguments and evidence presented in the briefing and at the hearing conducted on January 19, 2000, the Court now rules as follows.

II. FACTUAL BACKGROUND

Defendants are accused of violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), and Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), prohibiting fraudulent conduct in the offer or sale of securities. The undisputed facts are summarized below.

A. Molecular Dynamics, Inc.

During the relevant period, Molecular Dynamics, Inc. ("MDI") was a developer, manufacturer, and marketer of high performance image acquisition and analysis instrumentation for the life-science research market. MDI failed to meet market expectations for the quarters ended September 30, 1993 and January 2, 1994. In a press release conveying results for the third quarter ("Q3") of fiscal year 1993 ("FY93"), ended September 30, 1993, MDI predicted sales would weaken. The press release, issued on October 21, 1993, quoted MDI's president as saying:

"While the domestic market was reasonably strong in the third quarter, markets in Europe and the Pacific Rim continued to perform below expectations and we have recently begun to see some weakness in the United States. We believe this pattern may continue through the end of 1993 and into the first half of 1994. After considering several factors affecting our business, we believe that our growth rate will moderate over the next several quarters as compared to prior periods."

An MDI press release issued January 31, 1994 reporting on fourth quarter ("Q4") of fiscal year 1993 ("FY93") and FY93 results, stated that sales and income for Q4 FY93 increased compared to the prior year. It also quoted MDI's president as saying that the results "were encouraging in view of weak economic conditions in several major markets." The release also disclosed that MDI was negotiating for a new source of reagent kits for one of its major products and that there might be an announcement during the quarter.

MDI experienced a weakness in orders and revenues in January, February, and March of 1994. Although orders for MDI's products were often weak during the first two months of a quarter, the pace of sales often accelerated during the final month of a quarter. Sales in March 1994 failed to make up for the slow pace of orders in January and February 1994, however. The first quarter of FY94 ended April 3, 1994, and MDI's failure to meet revenue expectations was publicly announced April 6, 1994. That same day, MDI also announced it had reached an agreement with a supplier of reagent kits. The following day, April 7, MDI shares closed down 38%, from $10.00 per share to $6.125 per share.

B. Hahn Truong

Defendant Hahn Truong was the manager of a software group in the engineering department of MDI. Hahn joined MDI as a software engineer in 1988. In 1993, Hahn became a software manager and remained in that position until leaving MDI in 1997. During 1994, Hahn reported to Russell Singleton ("Singleton"), vice president of Engineering. Hahn's was not a senior staff position. He was not made privy to confidential sales and financial information in the normal course of his duties. Hanh sometimes attended senior staff meetings, but typically his presence was limited to technical presentations and he was not present for financial discussions.

1. Stock trading

Hahn was an active stock trader with a long history of trading stock in MDI and other companies. He opened a brokerage account with McLaughlin Capital ("McLaughlin") in February 1994 after his broker moved to that firm. Hahn also opened three accounts at Hambrecht & Quist ("H & Q") just before MDI went public in February 1993 for his trading in MDI, including exercising stock options. On February 1, 1994, Hahn held 5,000 shares of MDI stock in his H & Q account and 3,000 shares in the account he moved to McLaughlin. On February 8, 1994, Hahn exercised vested options to purchase an additional 11,000 shares of MDI stock. The exercise price was $.25 per share for 10,250 shares, and $.50 per share for 750 shares. Hahn used these shares as collateral to purchase 14,000 MDI shares in the open market at $12 per share in mid-February 1994.

Truong states that he intended to sell all of his MDI stock prior to the March 20, 1994 close of MDI's trading window for the quarter.*fn2 Hahn's trading during the March 1994 timeframe can be summarized as follows.

At some point between March 10 and March 15, 1994, Hahn met with Stephen Bennion, MDI's Chief Financial Officer, to ask if he could execute a trade*fn3 despite a lock-up affecting some employees. After conferring with counsel, Bennion informed Hahn that he was not affected by the lock-up.

On Thursday, March 17, 1994, Hahn called H & Q to sell 10,500 shares. Of these shares, 5,000 sold at $11.20 per share, 2,000 sold at $11.75 per share, and 3,500 sold at $11.40 per share. This sale was Hahn's third largest MDI transaction by market value.

On Friday, March 18, 1994, Hahn sold 5,000 MDI shares for $10.50 per share, 4,000 shares for $10.70 per share, 5,000 shares for $11.20 per share and 5,500 shares for $10.69 per share through his H & Q accounts. (H & Q also put in a sell order for 779 shares on March 18. Because Hahn only had 729 shares left to sell, that transaction went through, for the corrected amount, on March 21 at $10.69 per share.) The 19,500 shares Hahn sold on March 18 represented 29.6% of MDI's trading volume for that day. It was also Hahn's largest MDI transaction.

On Monday, March 21, 1994, 3,000 MDI shares in the McLaughlin account were sold. Although this trade occurred one day after the close of the trading window, Hahn states that he placed a limit order to sell the shares during the prior week, on March 17 or 18. Hahn's broker at McLaughlin believes he considered this a market order. These shares sold for $9.375 per share.

2. Negative financial information at MDI in February and March 1994

a. General indications of weak sales at MDI

i. February 16, 1994 supervisors' meeting

The SEC contends that Hahn attended a supervisors' meeting on February 16, 1994, at which the company president made a presentation entitled "State of the Company." A slide from that presentation included a bullet point stating: "Order Receipts Weak Worldwide." Hahn does not recall attending this meeting, but the SEC has provided the testimony of two employees who contend that Hahn was probably at that meeting. MDI employee Michael Miller testified that order shortfall and market dynamics were generally described. There is no evidence that specific numbers or sales projections for Q1 FY94 were discussed. At the meeting, CFO Bennion also gave a report that analysts expected 40 percent growth, or revenues in the $53 to $56 million range.

ii. Low activity in the manufacturing department

Hahn, as a software engineer, did not have a day to day relationship with MDI's manufacturing department, but MDI was not a very large company and an employee could walk through the manufacturing department at any time. Singleton testified that the number of MDI products on the floor at any time during the quarter could provide an employee with an indication of sales activity. In addition, a white board in a conference room in the manufacturing department indicated which unit was being shipping to which customer. Singleton testified that an employee viewing the white board could determine how many products had shipped and how many were without orders. He commented that engineers at MDI could "intuit . . . what they perceived the movement was on the manufacturing floor, and they could draw conclusions, correct or incorrect, based on that." Employees understood that shipment information on the white board was confidential.

iii. General cost-cutting measures

At some point prior to March 16, it appears that MDI's president Jay Flately asked his senior staff to cut their respective departments' expenses. On March 16, 1994, at 10:32 a.m., Flately sent an e-mail to senior managers, including Singleton, to emphasize that the staff was to take MDI's expense control program seriously and to eliminate all discretionary spending. The e-mail stated:

I wanted to reiterate and clarify my interpretation of our expense control program. My sense is that it is not being taken as seriously as it needs to be . ..
The plan we discussed was to eliminate all discretionary spending. To me this means

* NO TEMPS

* NO COMPUTER UPGRADES OR ACCESSORIES, MODEMS, ETC

* NO SOFTWARE PURCHASES

* NO UNNECESSARY TRAVEL

* NO SUBSCRIPTIONS THAT ARE NOT CRUCIAL [. . .]

* NO SEMINARS

* PROBABLY NO MORE BREAKFAST SUPPLIES FOR ENGINEERING AND MARKETING MEETINGS
* NO LUNCHES WITH CONSULTANTS, SCIENTISTS, CANDIDATES, ETC. UNLESS ABSOLUTELY NECESSARY FOR SCHEDULING REASONS

* ETC, ETC.

The e-mail continued: "I don't want to be the policeman on this, it needs to be managed by the Staff at the department level. Thanks in advance for your cooperation." The language of the Flately e-mail indicates that an expense control program of some sort was in place prior to March 16, 1994. However, the SEC has not offered specific evidence that the expense control program was known to employees at Hahn's level or that working conditions at MDI changed before March 22, 1994 in a way that would reflect the existence of an expense control program.

Singleton held an Engineering Managers meeting on March 22, 1994 from 10:15 to 10:45 a.m. On the agenda under "New Business" was an "Update from Sr. Staff Meeting," and a discussion about "Expense Control." Singleton testified that he would have disclosed a hiring freeze decision at this meeting, and would have discussed Flately's March 16th e-mail at this meeting. Hahn attended this meeting, but states that he has no recollection of any discussion regarding the Flately March 16 e-mail or the substance of the e-mail.

iv. Chill on new hires

Early in March 1994, Hahn expected to add a new software engineer to his team. By March 10, 1994 senior staff determined that MDI had to be very aggressive in managing headcount. On that date, the Human Resources department held up the hiring paperwork for the software engineer. There is no evidence that Hahn knew ...


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