SEC Prevails in Payton Insider Trading/Tipping Case

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.