Federal Jury Finds Brokers Liable in SEC Insider Trading Case
A federal jury in the Southern District of New York found two brokers liable for insider trading in SEC v. Payton et al. The inside information concerned a $1.2 billion acquisition of a software company.
SEC Division of Enforcement Director Andrew Ceresney remarked that the two "sophisticated stock brokers . . . used highly confidential information about an upcoming transaction to illegally make hundreds of thousands of dollars at the expense of ordinary investors who played by the rules. Today's jury verdict holding them liable for insider trading reaffirms our commitment to aggressively root out and prosecute insider trading schemes, including by taking defendants to trial, in order to protect the integrity of our markets."
Commentary
In the wake of the Supreme Court's October 2015 decision to deny review of the Second Circuit's Newman ruling on insider trading, this case involving alleged insider trading became a long and winding procedural road that led to the defendants' liability finding by a New York federal jury (Securities and Exchange Commission v. Payton et al., case number 1:14-cv-04644). In Newman, the Second Circuit set forth heightened standards for the SEC's establishment that an alleged insider tipper received a "personal benefit" of which the tippee was aware. At issue in the matter: a law firm associate who knew about an upcoming acquisition of a software company evidently divulged the details to his roommate, who then disclosed that information, which resulted in several brokers gaining access to it. After certain defendants pled guilty to the charges, their pleas were vacated in light of Newman. Even so, the jury found the defendants liable of insider trading. In the expected appeal, issues likely will include the extent to which Newman, which arose in a so-called classic insider trading case, applies to a lawyer's misappropriation of the acquirer's confidential information. Even if Newman is found to apply, another likely issue will involve the extent to which the tipper received legally sufficient gain by disclosing information in exchange for a reduction in shared living expenses with his roommate. The case reinforces the point that, post-Newman, a thicket of legal issues still need paring by appellate courts before the requirements for insider trading are settled.