The SEC has been aggressive in bringing insider trading cases, frequently pushing the edge of the law and the facts. Two examples of this are the Cuban case, and the Dorozhko or “computer hacker” case (both discussed here). As those cases illustrate, being aggressive yields mixed results. To date, the SEC lost in Cuban on a motion to dismiss in the district court, but prevailed in Dorozhko in the Second Circuit. In most cases however, the SEC’s aggressive posture is not tested because the parties simply settle, as, for example, Bank of America claims it did in its recent proxy case with the SEC (or is trying to do since the court has not accepted the deal), discussed here.

SEC v. Jewell, Civil Action No. 09-CV-7417 (S.D.N.Y. Filed Aug. 24, 2009) is an insider trading case where the Commission’s aggressive posture will not be tested. The facts to Jewell are straight forward. An unnamed Director of First Indiana Corporation, a bank holding company based in Indianapolis, attended a June 25, 2007 board meeting where the CEO was authorized to explore potential mergers. Subsequently, on Friday, July 6, 2007 at 11:58 a.m. the Director spoke with the bank’s Chairman, who informed him that there would be a special meeting of the board on Sunday, July 8, 2007.

On the Friday afternoon of the phone call, the Director spoke with the three defendants in the case, Nancy Jewell, Kristin Mays and Matthew Murphy, III, in addition to others. Ms. Jewell is a long time friend and business associate of the Director. She is employed at a private company owned by the Director. Ms. Mays is the daughter of the Director. She is employed by the Director’s company as the Assistant to the President. Mr. Murphy and the Director are business partners and have been engaged in a real estate venture since the mid-1990s. The Director had a history of sharing confidential information with each defendant, according to the SEC.

On Friday afternoon, the Director repeatedly complained to several people, including the three defendants, about having to attend a special board meeting on Sunday according to the Commission. Specifically, the complaint states: “Over the course of that [Friday, July 6, 2007] afternoon, the Director complained to several individuals, including each of the defendants, that the special Board meeting was going to ruin his Sunday afternoon plans.” This is the only allegation regarding any communications between the Director and the three defendants.

After hearing the comments of the Director each of the three defendants, that afternoon, purchased shares in First Indiana. Ms. Jewel purchased an unspecified number of shares using the equity in her brokerage account and the proceeds of a $20,000 loan. Following the July 9, 2007 announcement of a merger involving the bank, the share price increased and she made profits of $8,888. Ms. Mays placed trades through a Uniform Transfer to Minors Act account in her name using a $20,000 check her father had given her that day to cover expenses for her divorce. She made profits of $7,960. Mr. Murphy opened a brokerage account and purchased 1,000 shares which he later sold for a profit of $9,078.

The facts in the complaint clearly suggest that each defendant found the comments of the Director to be material information. Other people the Director complained to on Friday apparently did not — there is no indication they traded. There is no allegation that the Director asked the three defendants to keep his grumblings confidential. Nor is there any indication that any of the defendants had any idea how the events of the special board meeting would impact the share price of First Indiana stock, although each apparently guessed the information would be positive. The SEC does however allege that the three misappropriated material non-public information.

The three defendants chose to settle with the SEC rather than litigate the case. Each consented to the entry of a permanent injunction prohibiting future violations of Section 10(b) and Rule 10b-5. Each defendant also agreed to disgorge their trading profits and to pay prejudgment interest and a civil penalty equal to the trading profits. See also Litig. Rel. 21183 (Aug. 24, 2009). Sometimes aggressive enforcement yields results.