United States District Court, S.D. New York
For Securities and Exchange Commission, Plaintiff: A. Kristina Littman, LEAD ATTORNEY, PRO HAC VICE, U.S. Securities and Exchange Commission, Philadelphia, PA; Catherine Eleni Pappas, LEAD ATTORNEY, U.S. Securities and Exchange Commission (Phila), Philadelphia, PA; G. Jeffrey Boujoukos, LEAD ATTORNEY, David Lawrence Axelrod, U.S. Securities and Exchange Commission, Philadelphia, PA; Sharon Blaskey Binger, LEAD ATTORNEY, Securities & Exchange Commission, Philadelphia, PA.
For Daryl M Payton, Defendant: Sean Hecker, LEAD ATTORNEY, Matthew E. Fishbein, Debevoise & Plimpton, LLP (NYC), New York, NY; Ada Fernandez Johnson, Debevoise & Plimpton LLP (DC), Washington, DC; Jonathan Rosser Tuttle, PRO HAC VICE, Debevoise & Plimpton LLP (DC), Washington, DC; Noam B Greenspan, Rushmi Bhaskaran, Debevoise & Plimpton LLP, New York, NY.
For Benjamin Durant, III, Defendant: Gregory Robert Morvillo, LEAD ATTORNEY, Robert Craig Morvillo, Morvillo LLP, New York, NY.
OPINION AND ORDER
JED S. RAKOFF, UNITED STATES DISTRICT JUDGE.
As a general matter, there is nothing esoteric about insider trading. It is a form of cheating, of using purloined or embezzled information to gain an unfair trading advantage. The Unites States securities markets -- the comparative honesty of which is one of our nation's great business assets -- cannot tolerate such cheating if those markets are to retain the confidence of investors and the public alike.
But if unlawful insider trading is to be properly deterred, it must be adequately defined. The appropriate body to do so, one would think, is Congress; but in the absence of Congressional action, such definition has been largely left to the courts. This creates difficulties, because courts must proceed on a case-by-case basis. Sometimes those cases are criminal prosecutions, in which circumstance a court is obliged to define unlawful insider trading narrowly, so as to provide the fair notice that due process requires before a person may be placed in jeopardy of imprisonment. Other times those cases are civil proceedings, most often brought by the U.S. Securities and Exchange Commission (" SEC" ), in which circumstance a court is inclined to define unlawful insider trading broadly, so as to effectuate the remedial purposes behind the prohibition of such trading.
While the tensions thereby created cannot always be resolved in satisfactory fashion -- thus reinforcing the need for Congressional action -- they can to some degree be mitigated by focusing on differences of intent. Specifically, while a person is guilty of criminal insider trading only if that person committed the offense " willfully," i.e., knowingly and purposely, a person may be civilly liable if that person committed the offense recklessly, that is, in heedless disregard of the probable consequences. With respect to the motion here pending, that distinction arguably makes a difference.
In this case, the Amended Complaint alleges that the defendants, Daryl Payton and Benjamin Durant, III, unlawfully traded on material nonpublic information regarding IBM's 2009 acquisition of SPSS, Inc. Defendants assert that the recently decided Second Circuit decision, United States v. Newman, 773 F.3d 438 (2d Cir. 2014), reh'g denied, Nos. 13-1837, 13-1917, (2d Cir. Apr. 3, 2015), requires the Court to dismiss the SEC's Amended Complaint. The SEC responds that the requirements of Newman are inapplicable here and that, even if they are applicable, they are here satisfied by the Amended Complaint.
The relevant allegations of the Amended Complaint are as follows. In May 2009,
Trent Martin, who was then employed at a registered broker-dealer in New York, acquired material nonpublic information regarding IBM's pending acquisition of SPSS from his close friend, Michael Dallas. Amended Complaint (" Am. Compl." ) ¶ ¶ 1-2, 17, 48. Dallas was an associate at a law firm and had been assigned to work on the SPSS acquisition. Id. ¶ 17. Martin and Dallas had a history of sharing confidences such that a duty of trust and confidence existed between them. Id. ¶ 30. They each understood that the information they shared about their jobs was nonpublic and both expected the other to maintain confidentiality. Id. ¶ 39. In late May 2009, Dallas shared material nonpublic information about the SPSS acquisition with Martin, including information about the anticipated transaction price and the identities of the acquiring and target companies. Id. ¶ 48. In June and July 2009, Dallas continued to communicate with Martin and share further material nonpublic information about the acquisition. Id. ¶ 52.
From October 2008 through November 2009, Martin roomed with Thomas Conradt, a lawyer and registered representative associated with a broker in New York. Id. ¶ ¶ 19, 56. They shared a close, mutually-dependent financial relationship, and had a history of personal favors. Id. ¶ 56. Conradt took the lead in organizing and paying shared expenses for the apartment, including paying bills (such as cable, internet, power, and cleaning bills). Id. ¶ 57. He negotiated a rent reduction, renegotiated the cable bill for a 25 percent savings, hired a cleaning service, and arranged for apartment repairs. Id. ¶ 58. Conradt also assisted Martin after Martin was arrested following a street altercation on June 20, 2009 and charged with criminal assault. Id. ¶ 59. Specifically, on June 22, 2009, four days before he traded in SPSS securities, Conradt called a friend who was clerking for a judge to ask for advice on how Martin should deal with the arrest. Id. ¶ 60. Dallas, Martin, Conradt, and Conradt's friend then discussed the best legal strategy and potential attorneys to hire for Martin. Id.
About the same time, and, in any event, prior to June 24, 2009, Martin, in violation of his duty of trust and confidence to Dallas, tipped inside information about the SPSS acquisition to Conradt. Id. ¶ 61. On June 26, 2009, Conradt, on the basis of the information, bought SPSS securities. Id. ¶ 62. About a month later, in a conversation following the public announcement of the SPSS acquisition, " Martin thanked Conradt for his prior assistance with the criminal legal matter and ...