The SEC recently announced the filing of a settled action against Bernard L. Compton, a former Domino's Pizza executive accused of insider trading. The case, though somewhat typical in its facts, highlights two of the SEC's preferred "tools" in bringing insider trading actions: data analytics and internal corporate policies.
The complaint, originally filed on April 13, 2022, alleged that from at least April 2015 to July 2020, Compton accessed and reviewed confidential data relating to Domino's Pizza's financial performance and traded on that information in violation of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. Specifically, the SEC alleged that Compton purchased out-of-the-money options based on confidential information he received as Domino's "Program Leader" in the Finance Department. In that role, Compton prepared financial reports for Domino's senior management that summarized the company's financial performance for the reporting period and compared it to internal and external forecasts.
According to the complaint, on at least 12 occasions over the course of five years, Compton purchased options before Domino's public earnings announcements, resulting in illegal profits of $960,697. Under the settlement agreement, Compton neither admitted nor denied wrongdoing, but agreed to fork over roughly $1.92 million in civil penalties.1 In addition to monetary sanctions, Compton has been suspended from appearing or practicing before the SEC as an accountant.
The SEC's press release indicated that SEC staff used "innovative analytical tools" to uncover Compton's illicit trades. As Holland & Knight's SECond Opinions Blog has previously reported, the SEC's Division of Enforcement has increasingly and successfully utilized risk-based data analytics to bring a variety of cases, including alleged insider trading actions, market manipulation actions, and the three cases to date in the ongoing EPS Initiative focused on earnings per share reporting, among others. However, the use of data analytics to identify and investigate what the agency often calls "harder to detect" violations is not infallible. On Dec. 13, 2021, another of the SEC's analytics-based insider trading cases was dismissed on a motion for directed verdict when Judge Claude Hilton of the U.S. District Court for the Eastern District of Virginia concluded that the agency's evidence of so-called "suspicious trading patterns" was insufficient to establish its prima facie case.2
In its case against Compton, the SEC also cited two Domino's employee documents: the company's Code of Ethics and Insider Trading Policy. First, as is often the case for companies, "Domino's maintained a Code of Ethics, which directed employees to 'maintain the confidentiality of information entrusted to them by the Company' and prohibited 'employees from trading … in securities on the basis of material non-public information.'" The complaint also discussed the Domino's corporate Insider Trading Policy, which informed employees of the federal and state prohibitions related to trading on material non-public information.
Although it is not uncommon for the SEC to use corporate policies to bolster the breach of fiduciary duty and/or scienter elements of a Section 10(b) insider trading action, recently the agency seems to place more evidentiary eggs in this basket. The most striking example is the SEC's pending "shadow trading" case, in which the agency is leaning heavily on the defendant employer's insider trading policy, which extended to securities of other companies as well as its own. This case, and the SEC's defeat of the defendant's motion to dismiss, was discussed in an earlier SECond Opinions Blog post.
Though perhaps somewhat typical in its facts, the Domino's case highlights the SEC's continued reliance on data analytics and corporate policies in bringing insider trading actions. The question remains, however, as to how far the SEC is willing to stretch these tools going forward.