Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012), read opinion here.

Issue Addressed

This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation.  The motion was granted.


On November 21, 2011, the Court held an evidentiary hearing on the Motion for Sanctions and heard live testimony.  The paper record included depositions, affidavits and additional deposition transcripts and documents from the injunction phase of the case.

This action was originally filed in October 2010 challenging a merger between Occam Networks, Inc. and Calix, Inc.  In November 2010, the Court approved the Stipulation and Order governing the production and exchange of confidential information.  In December 2010, the Plaintiffs moved for a preliminary injunction against the merger and expedited discovery ensued.  After the discovery was nearly complete, Steinhardt began short-selling Calix’s stock.  He intended to and later did use the shares of Calix stock he would receive when the merger closed to cover his short sales, even though Steinhardt and his co-plaintiffs where asking the Court to enjoin the closing of the merger.

According to published reports, Steinhardt has a net worth of approximately $500 million and has been described in some reports as one of the most successful investors in the history of Wall Street.  In January 2011, after a hearing open to the public, the Court granted the Motion of the Plaintiffs for a Preliminary Injunction.  After the issuance of supplemental disclosures and the deposition of one of the lead investment bankers, which were conditions of the injunction, a special meeting of stockholders was held, additional disclosures where made, and the merger was approved in February 2011.

Legal Analysis

The Court emphasized that when a stockholder of a Delaware corporation files suit as a representative plaintiff for a class of similarly situated stockholders, the plaintiff voluntarily assumes the role of a fiduciary for the class.  As a fiduciary, the representative plaintiff “holds to those whose cause he advocates a duty of finest loyalty”.

The Court referred to a long list of Chancery transcript rulings at footnote 1 in which the Court of Chancery has addressed trading by representative plaintiffs, and has explained that trading by plaintiff–fiduciaries on the basis of information obtained through discovery undermines the integrity of the representative litigation process and is unacceptable.  It remains unacceptable for a plaintiff-fiduciary to trade on the basis of non-public information obtained in litigation.  See footnote 3.

The Court explained in detailed reasoning from those transcript rulings, and applied those rulings to the extensively described factual minutiae of the trading involved in this case, based on information obtained during the discovery as representative plaintiff.

Damages for Breach of Fiduciary Duty

The Court explained that the scope of remedy for breach of the duty of loyalty is not to be determined narrowly and that the disgorgement remedy rests upon “ a wise public policy that for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of confidence imposed by the fiduciary relation.”

The Court provided a detailed numerical listing of the trades and the “deemed purchases” in violation of the obligations to maintain the confidentiality of the information received in the litigation.  The Court deducted the implied basis of the stock from the actual sales proceeds to generate a disgorgement amount of approximately $534,000.00.  The Court encouraged the parties to double-check its math and if possible to distribute the funds to the class immediately.


The Court summarized its holding, in part, as follows:

Consistent with prior rulings by this Court when confronted with representative plaintiffs who have traded while serving in a fiduciary capacity, Steinhardt and the funds are dismissed from the case with prejudice, barred from receiving any recovery from the litigation, required to self-report to the Securities and Exchange Commission, directed to disclose their improper trading in any future application to serve as lead plaintiff, and ordered to disgorge profits in the amount of $534,071.45. 

Postscript: Professor Bainbridge provides scholarly insights about the case here.