A federal district court has ruled that the Securities and Exchange Commission failed to show by preponderance of the evidence that a corporate executive violated the securities laws’ prohibition against disclosing material inside information.  

The SEC alleged that defendant Frederick Anton, Chairman of the Board of Directors of publicly traded company PMA Capital Corporation (PMA), had a telephone conversation with David Johnson, a retired former executive of PMA, on October 31, 2003, during which Anton disclosed that PMA would be discontinuing its dividend and increasing its loss reserves. In the next three days, Johnson sold 40,000 shares of his PMA stock and advised his children to sell their PMA shares. On November 4, 2003, PMA announced that it would be increasing its loss reserves by about $150 million and that it planned to suspend dividends. As a result of his stock sales, Johnson avoided a total loss of over $325,000. He was subsequently charged with insider trading and settled with the SEC by paying a total of over $786,000. The SEC then filed its tipper liability action against Anton.  

In ruling for defendant after trial, the court found that the testimony against Anton was inconsistent and lacked credibility. Specifically, the fact that dividend elimination was discussed for the first time at a November 2, 2003, Board meeting indicated that Anton could not have discussed dividend elimination with Johnson on October 31. In addition, although Anton was aware of a “strong possibility” of a reserve increase, there was no evidence that he was involved in discussions or had “definite information” about such increase after September 30, 2003. Moreover, the court noted that information about a reserve increase, by itself, was not material where there was no alleged quantification of such increase and a strong likelihood of a future reserve increase was publicly known through PMA’s public disclosures. Finally, the court emphasized that the SEC did not show that Anton benefited financially from the alleged disclosure or that he conferred the information on Johnson as a gift, when the two were not friends. (SEC v. Anton, 2009 WL 1109324 (E.D.Pa. Apr. 23, 2009))