Court Rejects SEC Insider Trading Loss at Mid-Trial
Insider trading has long been a staple of the Division of Enforcement. Recent reports by the Commission, as well as those compiled by this publication, demonstrate that while those cases may not represent the leading category of actions being initiated by the Division, insider trading continues to be a key focus for the agency.
Many of those cases are based on patterns of circumstantial evidence – there is no direct testimony that anyone actually made available, or was furnished with, material non-public information. Rather, the patterns often focus on the actual trading coupled with additional facts such as the relationship between a corporate insider and the person engaged in the trading, to create an inference that may permit the trier of fact to infer illegal insider trading. While it can be difficult to establish insider trading based solely on circumstantial evidence, the Commission has been very successful in such cases. Typically the agency has been able to present suffice evidence, in addition to the evidence sketched above, to support the drawing of an inference of illegal conduct.
In SEC v. Clark, Civil Action No. 1:20-cv-01529 (E.D. Va.), however, the Court granted a defense motion following the completion of the Commission’s case at trial in a circumstantial evidence insider trading case. Specifically, the Court concluded that the agency had failed to present sufficient evidence which, if accepted, would constitute insider trading.
Named as defendants in the case were Christopher Clark, a mortgage banker, and William Wright, formerly a controller at CEB, Inc. Mr. Clark is the brother-in-law of Mr. Wright. The case centered on the acquisition of CEB, announced on January 5, 2017.
Between November 2016 and early January 2017 CEB engaged in merger discussions. During the period leading up to the announcement, Mr. Clark engaged in very risky trading involving CEB options. Beginning about one month after the talks began, Defendant Clark, according to the complaint, started purchasing call options. He continued until about the time of the deal announcement. During the discussion period he also told his son to purchase CEB securities.
To support its claim that Mr. Clark’s “suspicious trading” actually constituted illegal insider trading, the Commission pointed to repeated contacts between the two men such as text messages and personal meetings. In addition, the agency offered evidence of what were called “extraordinary” efforts to raise the capital necessary to acquire the options. Those included borrowing $6,000, obtaining an additional $20,000 by maxing out a credit card and obtaining a loan backed by his car. The Commission also pointed to the less than forthcoming responses to investigative questionnaires circulated by market regulators. All of this, coupled with 15 transactions in CEB options which yielded over $243,000 in trading profits, constituted proof of insider trading, according to the Commission.
Finally, to try and bolster its case, the agency pointed to the fact that beginning as early as 2008, and continuing through 2016, Mr. Clark traded in advance of 18 CEB quarterly announcements.
The Court was not convinced. Prior to trial it denied the Commission’s motion for summary judgment, concluding that there were material facts in dispute. Following the presentation of the Commission’s case at trial, however, the Court was not convinced that the agency had met its burden of proof. The Court ordered the case dismissed. The Court did not write an opinion.