SEC v. Mayhew

United States Court of Appeals for the Second Circuit · 1997 · Corporations

121 F.3d 44 (1997)

Updated August 22, 2026

CorporationsSecurities regulationInsider tradingTender offers§ 14(e)Rule 14e-3tender offermaterial nonpublic information

Facts

Rorer and Rhone-Poulenc engaged in confidential merger discussions from July 1989 to January 1990, using confidentiality measures, consultants, and meetings among top officials, and by early November a senior Rorer executive believed the merger was highly likely. On November 15, 1989, Rorer executive Ralph Thurman told consultant Edmund Piccolino, in confidence, that Rorer was definitely involved in serious merger talks and that the talks were far enough along to require work on the CEO's employment agreement. Piccolino relayed the essence of that conversation, identifying Thurman as the source, to Mayhew, who had earlier sold his Rorer holdings at a loss after merely speculating from press rumors that Rorer was a takeover candidate. The next day Mayhew shifted most of his portfolio into Rorer securities and later sold after Rorer publicly announced tender-offer discussions, realizing over $255,000 in profit.

Issue

Whether Mayhew was liable under § 14(e) and Rule 14e-3 when he traded on information indirectly conveyed from a Rorer insider confirming that Rorer was in serious ongoing merger discussions, even though the press had circulated takeover rumors and the tender offer was not announced until about two months later. A secondary issue was whether the SEC could obtain a remand for ITSA civil penalties when it had not alerted the district court to its omission.

Rule

Under § 14(e) and Rule 14e-3, a person may be liable for trading while in possession of material, nonpublic information relating to a tender offer once substantial steps have been taken to commence the offer, even if the trader owes no fiduciary duty. Information remains nonpublic when an insider's private confirmation adds specificity or immediacy beyond public rumor, and merger-related information is material when, under the probability-magnitude analysis, a reasonable investor would view it as significantly altering the total mix of information. Whether information is "in connection with" a tender offer depends on the facts of the case, not on an arbitrary temporal cutoff.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Boston, Lena Ortiz overhears from her friend Samir Kline that Samir's sister, a senior executive at Harbor Vale Biologics, privately confirmed Harbor Vale is in serious acquisition talks and has already begun discussing post-transaction executive roles. Lena has no relationship to Harbor Vale and buys a large block of Harbor Vale shares the next day before any public announcement.

If regulators sue Lena under Rule 14e-3 after a tender offer is later announced, Lena's best defense is that she owed no fiduciary duty to Harbor Vale. How likely is that defense to succeed?

Explanation. Under the majority opinion, Rule 14e-3 validly reaches trading on material, nonpublic information in connection with a tender offer without requiring that the trader owe a fiduciary duty to the corporation. Indirect receipt through an intermediary does not defeat liability if the trader possessed the information and traded on it.