Just Another Insider Trading Case Or One Worth Watching?

The SEC filed another insider trading case on Tuesday, part of its continuing war on insider trading. SEC v. Tedder, Civil Action No. 3-08-CV-1013-G (N.D. Tex. June 17, 2008). The complaint is based on trading in advance of a business combination, the acquisition of Aviall, Inc. by The Boeing Company. It names Robert Tedder and Brian Carr, two company employees as defendants. It also names two alleged tippees of Mr. Tedder (his father Joseph, and a business associate Philip Gunn), as well as a claimed tippee of Mr. Gunn (his brother Gregory) as defendants. In many respects, the claims differ little from those in other SEC insider trading complaints.

Tedder is in fact different from many other cases. First, none of the defendants settled. Few defendants litigate with the Commission. Corporate defendants frequently make a “business decision,” concluding that it is better to settle at any cost rather than litigate. Individuals frequently cannot afford the burden and expense of enforcement litigation. Thus, most SEC cases settle simultaneous with filing. None of the five defendants in this case settled, however.

Second, the case is based in part on an internal investigation conducted by Aviall. According to the complaint, the Philadelphia Stock Exchange alerted the company to suspicious trading in its options shortly after the merger announcement. The complaint does not detail findings of the inquiry. Nor does it state whether during the investigation statements were taken from Messrs. Tedder and Carr that were later turned over in some form (usually notes) to the SEC. Internal investigation witness interview notes are frequently a key part of cooperating with the Commission, particularly since it can give the SEC information it might not otherwise obtain – the witness may agree to be interviewed by the company, but not the Commission. Here, the complaint says only that the company terminated Mr. Tedder and Mr. Carr at the conclusion of the inquiry.

Finally, the complaint goes to some lengths to detail the basis for the SEC’s claims that defendants Tedder and Carr had material inside information about the merger. Many complaints allege that the insider obtained the information because he or she was working on the deal. Others claim that the information was misappropriated. Here, neither former employee was a member of the merger team. Neither misappropriated the information. Rather, the complaint details a series of events as the basis for having inside information: 1) an extended trading blackout at the company; 2) an executive tour at Aviall by Boeing executives; 3) becoming aware of repeated closed door meetings involving in-house counsel; 4) an e-mail inadvertently sent by Aviall’s CEO to 122 employees across the company concerning a conference call involving the directors, outside counsel and the financial advisor regarding due diligence; and 5) rumors.

Putting together bits and pieces of public information lawfully obtained does not of course constitute trading on inside information. In this case however, the complaint alleges that the key points cited in the complaint were material and non-public information. The defendants however appear to have a different view, which is perhaps the reason this case, unlike most, is in litigation. This case may be worth watching.