## Facts

- Rorer Group, Inc., a U.S. pharmaceutical company, engaged in confidential merger discussions with Rhone-Poulenc S.A. during 1989, intensifying in December 1989 and early January 1990.
- In the days immediately preceding a public announcement about the merger talks, trading volume in Rorer common stock and options rose sharply and unusually.
- Unifund SAL (a Lebanese investment company) and Tamanaco Saudi & Gulf Investment Group (a foreign investment entity) purchased substantial amounts of Rorer stock and options shortly before the announcement and sold soon afterward for significant profits.
- The SEC brought a civil enforcement action alleging insider trading under Exchange Act § 10(b) and Rule 10b-5, relying primarily on timing, volume, and profit pattern evidence.
- The SEC did not identify the alleged source of inside information (the tipper) at the preliminary-injunction stage.
- The district court issued preliminary relief that (1) enjoined future § 10(b)/Rule 10b-5 violations, (2) froze defendants’ accounts (with limited trading allowed), and (3) barred destruction or alteration of records.

## Issues

1. Whether the district court properly exercised personal jurisdiction over Unifund and Tamanaco and whether service of process was adequate.
2. What evidentiary showing the SEC must make to obtain (a) a broad preliminary injunction against future violations of § 10(b) and Rule 10b-5, as compared to (b) narrower preservative relief such as an asset freeze and record-preservation order.
3. Whether the SEC’s circumstantial evidence—without identifying the tipper—was sufficient to support the preliminary relief granted.

## Decision

- The court upheld the exercise of personal jurisdiction over the foreign defendants based on their alleged securities-law violations through trading in U.S. markets.
- The court affirmed preliminary relief freezing assets and requiring preservation of records (with tailoring/modifications to maintain funds sufficient for potential monetary remedies).
- The court vacated the portion of the order broadly enjoining defendants from future violations of § 10(b) and Rule 10b-5 because the SEC’s proof did not justify that more burdensome remedy at the preliminary stage, particularly given the absence of an identified tipper and a developed account of how defendants obtained material nonpublic information through a breach of duty.

## Legal Principles

- The SEC’s burden on a motion for preliminary injunctive relief varies with the intrusiveness and consequences of the requested order.
- A broad injunction against “future violations” of § 10(b) and Rule 10b-5 is an onerous remedy because it extends beyond preserving the status quo and can expose defendants to contempt for later securities-law violations; it therefore requires a considerable showing of likelihood of success, including a meaningful basis to infer a risk of recurrence.
- In an insider-trading case, suspicious trading patterns may support interim preservative remedies, but they may be insufficient to justify a broad forward-looking injunction where the SEC cannot, at that stage, identify and substantiate the source of the alleged inside information and the associated breach of duty or misappropriation theory.
- Asset freezes and record-preservation orders are primarily status-preserving tools to protect the court’s ability to award disgorgement and penalties and may be granted on a lesser evidentiary showing than an “obey-the-law” injunction.

## Conclusion

The Second Circuit held that while the SEC’s circumstantial evidence supported limited, preservative preliminary relief to secure assets and records pending adjudication, it did not support a broad preliminary injunction barring future § 10(b) and Rule 10b-5 violations where the SEC had not identified and substantiated the alleged source of the material nonpublic information or shown a sufficient likelihood of recurring misconduct.


S.E.C. v. Unifund SAL, 910 F.2d 1028 (2d Cir. 1990)