SEC Charges Tipping Without A Newman – Dirks Personal Benefit
The U.S. Attorney’s Office in Manhattan is trying to have the Second Circuit’s decision in U.S. v. Newman, No. 13-1837, 13-1917 (2nd Cir. Decided December 10, 2014 ) reheard and reversed. In seeking that rehearing the Government has argued in part that the decision will hamper insider trading prosecutions. Whether the Court will agree to rehear the case remains to be seen, although such hearings are rare.
The SEC may have found another approach however. Last month the Commission filed an insider trading case styled SEC v. Zeringue, Civil Action No. 3:15-cv-00405 (W.D. La. Filed Feb. 19, 2015). It involved tipping. The core of the action is straight forward. Defendant Scott Zeringue was a the vice president of construction operations at Shaw Group, Inc., an energy construction company. Defendant Jessie Roberts is his brother-in-law.
The complaint centers on the acquisition of Shaw by Chicago Bridge & Iron in a deal announced on February 13, 2013. Prior to the deal announcement, Mr. Zeringue learned of the then pending transaction through his employment. He purchased 125 shares of Shaw. He also told his brother-in-law about the deal and asked him to purchase additional shares for him. Mr. Roberts made purchases, and tipped Friend A. Both traded. Overall Mr. Roberts had trading profits of $765,000 while the other traders profits totaled $154,000 The action alleges violations of Exchange Act Section 10(b).
There was little question, based on the face of the complaint, that the tip from Mr. Zeringue to his brother-in-law met the Newman personal benefit test. There the court, returning to Dirks v. SEC, 463 U.S. 646 (1983), held that there has to be a benefit to the insider from the tip that is in the nature of a quid pro quo and is known to the tippee. The Zeringue complaint in this regard claims that Mr. Roberts paid his brother-in-law $30,000 for the tip. It also alleges that Mr. Zeringue initially told his brother-in-law about the deal because he wanted him to trade additional shares for his benefit.
Now, however, the SEC has amended its complaint, adding Billy Joe Adcox, Jr. as a defendant. Mr. Adcox is employed as a pharmaceutical salesman. He is, according to the complaint, a “long-time friend” of Mr. Roberts. Mr. Roberts told his long-time friend about the then pending deal. In doing so “Roberts told Adcox he had learned the information from his brother-in-law, a Shaw insider.” Mr. Adcox traded while in, possession of the information. He had $28,000 in trading profits. Mr. Adcox also tipped another individual who traded.
The SEC does not make any reference to the Newman personal benefit test in describing the Roberts-Adcox tip. Rather, the allegations are limited to a claim that Mr. Adcox learned the information came from a corporate insider. The complaint does allege violations of Exchange Act Section 10(b).
Mr. Adcox has not settled with the Commission. There is good reason. On its face the amendment to the complaint does not appear to comply with Newman. Rather, it follows the Commission’s long time, pre-Newman approach of apparently relying on the relationship between the two men. Whether the SEC can convince a district court in the another circuit that Newman should not be followed remains to be seen. If so, eventually there could be a circuit split – assuming that Newman is not reheard by the Second Circuit. That would give the Commission an opportunity to roll back Newman to the more prosecution friendly standard of proof the U.S. Attorney is seeking with the request to rehear Newman. On the other hand, the SEC might do well to remember that Newman stems from the reversal of a district court decision in which the U.S. Attorney convinced the court not to give a personal benefit instruction. See Lit. Rel. No. 23215 (March 6, 2015).