In an opinion today, Judge Rakoff explained why he would decline to refer Darlyl Payton, a defendant who was recently found liable an SEC insider trading case, to the U.S. Attorney’s Office for a perjury prosecution related to Mr. Payton’s testimony in the SEC case. Mr. Payton had pleaded guilty to criminal insider trading charges but later was allowed to withdraw the appeal in light of the Second Circuit’s decision in United States v. Newman, which held that insider trading required the recipient of a stock tip to have “knowledge that the insider disclosed confidential information in exchange for personal benefit.” Judge Rakoff concluded that Mr. Payton testified at the SEC trial in a manner that was materially different than his earlier plea allocution, but nonetheless found that a criminal referral was not warranted for four reasons:

First, . . . the jury did find Mr. Payton liable, so in that respect any perjury by Mr. Payton that occurred in the trial did not ultimately undermine the workings of the legal process . . . .

Second, as a consequence of Mr. Payton’s having been found liable, he faces substantial civil penalties . . . .

Third, a Court should be very cautious about making such a referral and should do so only in exceptional cases, since, as this Court previously stated in another case, the threat of a perjury referral, if frequently invoked, might “have a chilling effect on civil litigants who wish to testify in suspicious circumstances.”

Fourth, because a formal perjury referral from a federal judge carries heavy weight, it may impede the prosecution from exercising its own independent judgment as to whether perjury has occurred or whether, even if it has, criminal prosecution is appropriate. This last consideration takes on a special meaning in this case, given that the plaintiff, the SEC, is itself a government entity. It may be unrealistic to believe that prevailing private parties to a civil suit will refer matters to the U.S. Attorney’s Office for possible perjury prosecution [but] . . . [n]othing stops the SEC from asking the U.S. Attorney’s Office to investigate whether Mr. Payton engaged in perjury.

Prior posts on the case are here.