In an opinion yesterday, Judge Rakoff denied a summary judgment motion brought by two SEC defendants who traded on a tip that IBM was about to acquire a company called SPSS.  The tip passed from a lawyer working on the deal (Dallas) to his friend (Martin), then to Martin’s roommate (Conradt) and, ultimately, to the two defendants.

The SEC ‘s theory was that Martin and Dallas had an understanding that the information would not be used for trading, and that Martin breached that duty by telling his roommate Conradt in exchange for various miscellaneous benefits from Conradt, such as his taking the lead on dealing with issues at their apartment.  The defendants acted with the required knowledge, according to the SEC, because they consciously avoided learning anything about the source of the tip.

The defendants first attacked the premise that Martin and Dallas had an understanding that the information was not to be used for trading because Martin texted Dallas shortly after the tip, “I’m going to hit that stock I reckon.”  Judge Rakoff found that this was not enough for summary judgment because “the meaning and import of these text messages is subject to multiple reasonable interpretations.”

For the personal benefit requirement — which was made more robust by the Second Circuit’s ruling in United States v. Newman —  Judge Rakoff found it sufficient that Conradt “took the lead in organizing and paying shared expenses, and resolving problems at the[ir] apartment.” Conradt also helped Martin with an arrest and charge for assault.

Finally, Judge Rakoff found that, even under the more stringent standards of Newman, the SEC did not need to prove that the defendants knew of all of these details because they consciously tried to remain ignorant:

The defendants knew that Conradt’s roommate Martin was the source of the SPSS information. Defendants also knew that Martin and Conradt were friends.  In addition, Conradt testified that he told the defendants not to tell anyone about the SPSS information “[b]ecause I told them Trent [Martin] had mentioned not to say anything about it.”

Despite all this, the defendants did not ask Conradt for more information about the source of the tip or its circumstances. Their subsequent conduct reasonably suggests that this was because they understood, but chose to consciously disregard, the means by which the SPSS information was obtained. Specifically, after the SPSS deal was announced, the defendants participated in a meeting in a hotel in which various tippees discussed potential next steps and [one defendant] suggested that if questioned about their SPSS transactions, everyone should say they “liked tech.”  There is no evidence that [the other defendant], who was present at that meeting, demurred.

The briefs for the motion are here (defendants) and here (SEC).