SEC Brings Another Insider Trading Case As Administrative Proceeding

There is little doubt that the SEC is bringing more cases in an administrative forum. While the agency has not acknowledge the trend, over the last several months it has filed a series of insider trading cases as administrative proceedings (here) rather than in Federal district court. Generally those actions were settled, although one was contested and later dismissed at the request of the Division.

This trend is particularly significant since insider trading law has been developed by the courts, not Congress. Filing cases in an administrative forum eliminates the role of the Federal courts in the development of insider trading law, leaving it largely to the SEC, with perhaps exception of the few cases that are appealed to a Circuit Court for review. This raises significant questions regarding the development of key elements of the offense such as the requirements for tipping in the recent Newman decision by the Second Circuit which restored the Dirks personal benefit test in Exchange Act Section 10(b) cases (here).

Now the SEC has brought another insider trading case as an administrative proceeding. Interestingly, the action is based on a second tier tip, and is being contested. It is not based on Section 10(b). In the Matter of Charles L. Hill, Jr., Adm. Proc. File No. 3-16383 (Feb. 11, 2015).

The action centers on the tender offer by NCR Corporation for Radiant Systems, Inc., announced on July 11, 2011 after the close of the markets. The deal began in early May 2011when NCR’s CEO called that CEO of Radiant and expressed an interest in a possible deal. Later that month Radiant’s board authorized discussions.

By mid-June a written offer was made by NCR to acquire Radiant. The offer followed the commencement of due diligence. By the end of the month, Radiant’s board approved an exclusivity agreement. The deal was structured as a tender offer in an agreement executed on July 11, 2011.

Radiant’s COO, the brother of the CEO, learned about the deal in early May. Subsequently, he continued to discuss the matter with his brother. COO also negotiated his employment terms in the event that the deal was consummated.

The COO’s had a Friend with whom he shared material, non-public information about the pending tender offer. The COO had been known Friend since childhood. They attended college together. Both resided in Atlanta. They routinely shared confidential information. Friend also knew the position COO held at Radiant.

Friend had a close personal relationship with Charles Hill. While the two frequently spoke, there is no allegation that they routinely exchanged confidential information.

During the deal period the Order alleges that Friend furnished Mr. Hill with material, non-public information about the pending tender offer for Radiant. Mr. Hill “was aware of the relationship” between Friend and COO. Mr. Hill was also acquainted with COO. There is no allegation that Friend received any benefit for transmitting the information.

Mr. Hill made a series of purchases of Radiant stock beginning on June 1, 2011. Eventually he acquired over 100,000 shares of a stock he had not purchased over the last four years. By July 8, 2011 the shares had a value of over $2.2 million. At the time of the purchases Mr. Hill knew, or had reason to know, that the information he obtained was material and non-public, according to the Order, and he had reason to know it came directly or indirectly form Radiant, or an officer, director or employee of the company. Each of the purchases was made after NCR had taken substantial steps to commence the tender offer.

Following the deal announcement the share price of Radiant increased over 30%. Mr. Hill had profits of about $744,000. The Order alleges violations of Exchange Act Section 14(e) but not 10(b). The proceeding will be set for hearing.

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