by T. GormanPosted on Posted in SECActions

The SEC prevailed in its insider trading/tipping case against two New York brokers were Newman and its tipping standard was a key issue. SEC v. Payton, Civil Action No. 14 civ 4644 (S.D.N.Y.). On Monday a jury in New York found in favor of the SEC and against the defendants.

The action involved insider trading claims centered on the IBM acquisition of SPSS. Defendants Daryl Payton and Benjamin Durant were remote tippees as were the defendants in Newman. The inside information on the deal traced to attorney Michael Dallas, an associate at New York law firm Cravath Swaine & Moore LLP who had been assigned to work on the deal.

Mr. Dallas was close friends with broker Trent Martin. The two men had a history of sharing confidential information. Beginning in the spring of 2009 Mr. Dallas told his friend about the SPSS deal. Over time he provided updates. Both men understood that the information they shared regarding their work was non-public and confidential. Both expected that confidentiality would be maintained, according to the SEC complaint.

Mr. Martin was roommates with Thomas Conradt, an attorney employed at another New York brokerage firm. They had a close, mutually dependent financial relationship with a history of personal favors. Mr. Martin told his roommate about the SSPS deal. Mr. Conradt purchased shares of SPSS prior to the deal announcement on July 28, 2009.

Defendants Payton and Durant were co-works of Mr. Conradt. The three men had discussions about Mr. Conradt’s roommate – Trent Martin. Each knew that Mr. Martin worked at a brokerage firm. Mr. Conradt told his co-workers that he learned about the SPSS acquisition from his roommate. Messrs. Payton and Durant did not ask more about the roommate. They did purchase shares of SPSS just prior to the public announcement of the deal. The SEC charged Messrs. Payton and Durant with insider trading.

At trial a critical issue at trial was whether there was a Newman type benefit. That same issue was the focal point of a Motion to Dismiss brought at the outset of the SEC’s action. In an opinion written by Jude Rakoff, that motion was denied.

A parallel criminal case was filed. U.S. v. Conradt, 12 cr. 887 (S.D.N.Y.). Messrs. Martin and Payton, among others, were each charged with insider trading based on essentially the same facts as in the SEC case. Each pleaded guilty prior to the decision in Newman. Following the Second Circuit’s decision in Newman, Judge Carter vacated the guilty pleas and dismissed the criminal charges. U.S. v. Conradt, 12 – 887 (S.D.N.Y. Order Dated January 22, 2005). The court concluded that there was an insufficient factual basis for the pleas as required by Rule 11(b)(3) of the Federal Rules of Criminal Procedure.

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by T. GormanPosted on Posted in SECActions

The SEC announced the partial resolution of one action last week and the conclusion of another. One centered on the collapse of Dewey & LeBoeuf, LLP. The other concluded an insider trading action involving inside information gleaned from the credit card files of Capital One Financial Corporation .

First, in SEC v. Davis (S.D.N.Y. Filed March 6, 2014) the Court entered a final judgment by consent against Francis Canellas, the former finance director of firm. The court entered a permanent judgment prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also provides for the payment of disgorgement, prejudgment interest and a financial penalty in amounts to be determined later.

The initial action was brought against five executives and finance professionals formerly with the collapsed law firm. In addition to Mr. Canellas, the defendants are: Attorney Steven Davis, chairman of the firm; attorney Stephen DiCarmine, executive director; Joel Sanders, CFO; and Thomas Mullikin who held several accounting positions. The complaint alleges that in connection with a $150 million private bond offering in 2010 the firm and the defendants engaged in financial fraud, furnishing purchasers a PPM with false financial information. In fact, the financial fraud traced back to 2008 when the firm began falsifying its books. Bond purchasers were also furnished with quarterly financial information which was false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 23475 (February 26, 2016).

The second action is SEC v. Huang, Civil Action No. 15-cv-269 (E.D. Pa.). There the court issued a memorandum opinion and final judgment against Nan Huang who was found liable for insider trading following a jury trial. The court entered a permanent inunction and directed the payment of $4,403,545 in disgorgement, prejudgment interest and a penalty of $8,807,090.

The complaint alleged insider trading based on the misappropriation theory against two former employees of the financial institution, Bonan Huang and Nan Huang. From November 2013 through January 2015 the two defendants were alleged to have misappropriated material inside information from their employer and used it not to trade in the shares of Capital One but those of retail establishments reflected in the credit card statements of firm card holders. Specifically, the defendants, employed as data analysts, were tasked with analyzing transactions for possible fraudulent credit card activity. As such the two men had access to customer data held by the Capital One. That included details on numerous consumer purchase transactions. The two men used their access to gather information regarding purchases and analyze potential sales trends at various retail establishments. The results of the analysis were then employed to trade in shares of the firms prior to earnings announcements. The scheme generated over $2.8 million in trading profits in one of their accounts. See Lit. Rel. No. 23476 (February 26, 2016).

Defendant Bonan Huang settled with the Commission shortly before trial, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b), and agreeing to pay disgorgement, prejudgment interest and penalties totaling over $4.7 million. See Lit. Rel. No. 23438 ( December 23, 2015).

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