Delaware Supreme Court reverses Chancery Court and upholds insider trading claims against KKR
December 28, 2011
Gardy & Notis, LLP has been appointed by the Court as lead counsel for shareholders of Primedia, Inc. (NYSE: PRM) seeking to recoup damages against Kolberg Kravis Roberts & Co. L.P., Henry R. Kravis, and other Primedia insiders based on allegations that KKR controls Primedia and used Primedia's inside information to buy Primedia securities at depressed prices and achieve roughly $150 million in insider trading profits.

After four years of litigation, the Delaware Chancery Court dismissed the case on July 14, 2010. With respect to whether KKR traded on Primedia's inside information, the Chancery court found that “KKR had the inside information and planned to trade on the basis of that inside information. They thought it was a great thing that they knew this stuff that wasn't yet out in the street. And in fact, they wanted to get their opportunity in before the street really perceived that Primedia was strengthening."

However, the Chancery Court determined that the insider trading claims asserted under Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949 ) were worthless because although KKR profited from its trades, Primedia itself was not damaged by KKR's purchases and did not have the financial ability to buy the shares, and therefore had no remedy to disgorge KKR's trading profits under the rule of law stated in Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010).

Gardy & Notis, LLP appealed the decision to the Delaware Supreme Court, and on June 20, 2011, the Supreme Court reversed the Chancery Court. The Supreme Court found that:

• “[T]he Vice Chancellor held that under the law, as explained in Pfeiffer v. Toll, disgorgement is not an available remedy for most of the Brophy claims. But, Pfeiffer's holding—which requires a plaintiff to show that the corporation suffered actual harm before bringing a Brophy claim—is not a correct statement of our law. To the extent Pfeiffer v. Toll conflicts with our current interpretation of Brophy v. Cities Service Co., Pfeiffer cannot be Delaware law."

• “[A]ctual harm to the corporation is not required for a plaintiff to state a claim under Brophy…. As the court recognized in Brophy, it is inequitable to permit the fiduciary to profit from using confidential corporate information. Even if the corporation did not suffer actual harm, equity requires disgorgement of that profit."

• “We decline to adopt Pfeiffer's thoughtful, but unduly narrow, interpretation of Brophy and its progeny. We also disagree with the Pfeiffer court's conclusion that the purpose of Brophy is to “remedy harm to the corporation." In fact, Brophy explicitly held that the corporation did not need to suffer an actual loss for there to be a viable claim. Importantly, Brophy focused on preventing a fiduciary wrongdoer from being unjustly enriched. Moreover, we have found no cases requiring that the corporation suffer actual harm for a plaintiff to bring a Brophy claim. To read Brophy as applying only where the corporation has suffered actual harm improperly limits its holding."

The decision from the Supreme Court was listed on the Harvard law School Forum on Corporate Governance and Financial Regulation as one of the “Top Five Cases on corporate and commercial law from Delaware for 2011."

The case is In Re Primedia Inc. Derivative Litigation, C.A. No. 1808-VCL, Delaware Court of Chancery.
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