A recent decision from the United States District Court for the Southern District of New York allowing a U.S. Securities and Exchange Commission (SEC) civil enforcement action to proceed against two former stockbrokers for alleged insider trading violations sheds additional light on application of the 2nd Circuit’s decision in United States v. Newman, No. 13-1837-cr(L) (2d Cir. Dec. 10, 2014). In the new decision, SEC v. Payton, No. 14 Civ. 4644 (S.D.N.Y. Apr. 6, 2015), Judge Jed S. Rakoff upheld the SEC’s allegations that traders Daryl Payton and Benjamin Durant III of Euro Pacific Capital improperly traded software company SPSS, Inc.’s stock based on material nonpublic information regarding the company’s pending acquisition by IBM. Payton and Durant allegedly received the tips from their Euro Pacific colleague Thomas Conradt, who in turn received them from his roommate, Trent Martin. Martin, in turn, originally learned of details regarding the IBM acquisition from a law firm associate working on the SPSS/IBM deal.
As previously reported, the 2nd Circuit’s December 2014 Newman decision attempted to clarify and delineate the boundaries of insider trading liability in tipper-tippee scenarios by holding that: (1) the personal benefit provided to the tipper—which has long been recognized as a necessary precondition in order for tipper-tippee insider trading liability to attach—must amount to a potential gain to the tipper of a pecuniary or similarly valuable nature and must resemble a quid pro quo; and (2) a tippee must know that the insider received a personal benefit. The Newman decision has been the subject of much commentary and has led the government to abandon prosecution of some criminal cases in which the evidence of the personal benefit to the tipper, or the tippee’s knowledge of the benefit, was deemed insufficient under Newman. Indeed, in February 2015, the U.S. Attorney’s Office for the Southern District of New York dropped the criminal insider trading charges pending against defendants Payton and Durant in light of Newman.
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