Why it matters: On February 29, 2016, a federal jury in SEC v. Paytonfound two former Euro Pacific Capital Inc. brokers civilly liable for downstream tippee insider trading in connection with IBM Corporation's $1.2 billion acquisition of SPSS, Inc. in 2009. Criminal charges against the former brokers had been dropped by the DOJ after the Second Circuit's 2014 decision in U.S. v. Newman, but the SEC pressed on with parallel civil charges against the ex-brokers and, after a two-week trial, won the favorable verdict from the jury.
Detailed discussion: On February 29, 2016, a Southern District of New York jury in SEC v. Payton found former Euro Pacific Capital Inc. brokers Daryl M. Payton (Payton) and Benjamin Durant III (Durant) civilly liable under Section 10(b) of the Securities Exchange Act of 1934 ('34 Act) and Rule 10b-5 for trading on confidential information ahead of the $1.2 billion acquisition of SPSS, Inc. (SPSS) by IBM Corporation in 2009. The court will decide remedies at a later date.
Briefly, the SEC had alleged in its complaint that Payton and Durant were "downstream tippees" who illegally traded on a tip about the SPSS acquisition received from friend and fellow broker, who had in turn received the tip from his roommate and friend, who had in turn received the information about the acquisition (including company names and anticipated transaction price) on a confidential basis from an attorney friend involved in the deal. The SEC further alleged that Durant and Payton made more than $629,000 and $254,000, respectively, in illicit profits from the tip. The DOJ had originally pursued criminal insider trading charges against Payton and Durant and three others, but those charges were dropped in January 2015 in light of the Second Circuit's 2014 decision in U.S. v. Newman that adopted a narrow standard for establishing the "personal benefit" part of the breach of fiduciary duty element at the core of an insider trading cause of action, thus making it difficult for the government to prove a criminal case for downstream tippee liability (as we reported in our February 2015 newsletter, while the U.S. Supreme Court declined the DOJ's petition for writ of certiorari inNewman, it recently agreed to review the Ninth Circuit's decision in U.S. v. Salman that caused a split with the Second Circuit over its "personal benefit" interpretation).
In June 2014, in conjunction with the DOJ's criminal charges, the SEC had filed civil charges for disgorgement under the '34 Act against Payton and Durant in the Southern District of New York, and persevered with their civil case (and its attendant lower burden of proof) after the criminal charges were dropped. The trial commenced in mid-February 2016, and press accounts detailed the defendants' attempts to convince the jury that, although they admittedly traded on non-public information, it did not constitute illegal insider trading under the narrow personal benefit standard established in Newman. The jury was not convinced, and returned the verdict against Payton and Durant two weeks later.
After the verdict, SEC Director of Enforcement Andrew Ceresney issued a statement that "Payton and Durant were sophisticated stock brokers who 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."
See here to read the SEC's 3/2/16 litigation release entitled "SEC Obtains Jury Verdict in Its Favor Against Former Brokers On Insider Trading Charges."
See here to read the SEC's 2/29/16 press release entitled "Statement [by SEC Director of Enforcement Andrew Ceresney] on Jury's Verdict in Trial of Daryl Payton and Benjamin Durant."
For more on this topic, see the (1) 2/29/16 Reuters article by Nate Raymond entitled "N.Y. brokers lose SEC insider trading trial over IBM deal tip" and (2) 2/16/16 BloombergBusiness article by Patricia Hurtado entitled "Ex-Brokers Go on Trial in Test of Revised Insider Law."