## Facts

- Jonathan Mayhew, a full-time securities trader, pursued a strategy of buying stock and options in likely takeover targets.
- Mayhew regularly spoke about investing with his neighbor, Dr. Edmund Piccolino, a partner at a consulting firm.
- Rorer Group, Inc. and Rhone-Poulenc S.A. engaged in confidential merger discussions protected by a confidentiality agreement, limited dissemination, and coded references.
- A senior Rorer executive privately told Piccolino that Rorer was in serious negotiations with one or more merger candidates.
- During a walk, Piccolino told Mayhew information conveying that a merger involving Rorer was “imminent and probable,” effectively confirming market rumors with insider-derived certainty.
- After receiving the tip, Mayhew bought significant amounts of Rorer stock and options and later profited when the transaction became public and RPSA made a tender offer.
- The SEC brought a civil enforcement action alleging violations of Exchange Act § 14(e) and Rule 14e-3, seeking injunctive relief, disgorgement, and civil penalties.

## Issues

1. Whether insider-sourced confirmation that a merger was “imminent and probable” was nonpublic information despite widespread market rumors.
2. Whether that confirmation was material to a reasonable investor.
3. Whether trading on this information before the formal announcement was “in connection with” a tender offer under § 14(e) and Rule 14e-3.
4. Whether the district court erred by not imposing civil penalties under the Insider Trading Sanctions Act.

## Decision

- The Second Circuit affirmed the judgment finding Mayhew liable under § 14(e) and Rule 14e-3.
- The court held the information Mayhew received was nonpublic because it conveyed insider-derived confirmation of serious negotiations and likelihood of a merger, not merely repetition of public rumors.
- The court held the information was material because it significantly changed the total mix of information by increasing the perceived probability of a major transaction.
- The court held Mayhew’s trading was “in connection with” a tender offer because the confidential negotiations about which he received information culminated in a tender offer, and Rule 14e-3 reaches pre-announcement trading on such information.
- The court rejected the SEC’s cross-appeal seeking ITSA penalties, leaving in place the district court’s remedies (disgorgement and injunctive relief) without civil penalties.

## Legal Principles

- Under Rule 14e-3, a trader may be liable for trading on material, nonpublic information relating to a tender offer even without a fiduciary duty to the issuer.
- Market rumors do not necessarily render information “public”; insider confirmation that negotiations are serious and a deal is likely can remain nonpublic.
- Materiality turns on whether the information would matter to a reasonable investor in light of the “total mix,” including probability and magnitude of the contemplated transaction.
- The “in connection with” requirement under § 14(e) and Rule 14e-3 can be satisfied by trading on confidential pre-offer negotiations that in fact result in a tender offer.
- Appellate review may sustain liability and equitable remedies while leaving undisturbed a district court’s decision not to impose discretionary civil penalties.

## Conclusion

The Second Circuit held that trading based on insider-confirmed merger negotiations—despite existing public speculation—can violate § 14(e) and Rule 14e-3 when the information is material, nonpublic, and tied to negotiations that culminate in a tender offer, and it affirmed the remedies imposed without requiring civil penalties.


Securities & Exchange Comm’n v. Mayhew, 121 F.3d 44 (2d Cir. 1997)