Rosenthal v. New York University: No Legal Obligation to Award MBA after Student Pled Guilty to Insider Trading

In Rosenthal v. New York University, No. 10-4168-cv., 2012 WL 1700843 (2nd Cir. May 16, 2012), the Second Circuit Court of Appeals affirmed the district court’s dismissal of Ayal Rosenthal’s claims for relief. The court also held that New York University (“NYU”) did not have a “legal obligation” to confer a Master of Business Administration (“MBA”) to Rosenthal after he pled guilty to insider trading while attending NYU.

According to the Complaint, Rosenthal was a certified public accountant at Pricewaterhouse Coopers (“PwC”) while attending NYU’s Stern School of Business (“Stern”) as an MBA candidate. Through his employment at PwC, Rosenthal learned of “material non-public information” concerning a transaction between two publicly traded companies; he provided this information to his brother, who subsequently traded on this tip. Rosenthal completed the academic requirements for an MBA in December 2006; he pled guilty to insider trading in February 2007. He never disclosed to Stern that he was the subject of a criminal securities investigation, but somehow Stern discovered Rosenthal’s guilty plea in February 2007 and commenced a disciplinary review. In October 2007, Stern informed Rosenthal that he would not be awarded the MBA.

Rosenthal asserted that his implied contract with Stern prohibited the university “from punishing him for off-campus conduct, however egregious the conduct or connected it may be to his academic pursuits.” However, the court reasoned that Stern’s Code of Conduct provided notice to students that they must act with “personal honesty, integrity, and respect for others,” and Stern informed students that the faculty’s disciplinary jurisdiction includes “[v]iolation of federal, state and local laws.”

Rosenthal also argued that Stern’s policies contradicted  “general [NYU] policy” which prohibited disciplinary action for violations outside the academic context; therefore, according to Rosenthal, Stern’s policies that were “inconsistent with that [NYU] policy are themselves without force.” After noting that NYU’s policies were confusing, the court held that under New York law, courts give great deference to a university’s decision, and courts “will disturb [universities’] decisions only if their actions are arbitrary, irrational, or in bad faith.” The court reasoned that, “[w]ithout question, a business school faculty could reasonably believe such [criminal] conduct is not befitting of a member of the academic business community . . . .” Accordingly, the conflicting interpretations were left to the university to reconcile, and neither NYU nor Stern was found to have “acted arbitrarily, irrationally, or in bad faith.”

The primary materials for this case may be found on the DU Corporate Governance website.