The Impact of Newman on SEC Enforcement: Part III
This is the third segment of a five part series discussing the impact of the Second Circuit’s ruling in Newman on SEC insider trading cases
Post Newman SEC Actions
In the wake of Newman the SEC has three apparent options: 1) Comply with Newman’s pleading requirements; 2) bring its actions as administrative proceedings; or 3) bring actions outside of the Second Circuit where the decision may not be applicable.
1. Cases which follow Newman
One option is for the SEC to only bring cases which meet the Newman test. The agency followed this approach, at least in part, in two recent cases brought outside of the Second Circuit, SEC v. Kanodia, Civil Action No. 15-cv-00479 (D. Conn. Filed April 2, 2015) and SEC v. Zeringue, Civil Action No. 3:15-cv-00405 (W.D. La. Filed Feb. 19, 2015) . However, when the Commission amended the complaint in Zeringue, adding a new tippee defendant, Newman was not followed.
SEC v. Kanodia, Civil Action No. 15-cv-00479 (D. Conn. Filed April 2, 2015) is an action which names as defendants Amit Kanodia and Iftikar Ahmed, two close friends. The action centers on the potential acquisition of Cooper Tire and Rubber Company by Apollo Tyres Ltd, which was announced on June 12, 2013 but never consummated. During the negotiations which led to the announcement, Mr. Kanodit was married to the general counsel of Apollo. He misappropriated inside information about the deal from his wife and gave it to Mr. Ahmed who shared it with another Trader. Both Mr. Ahmed and Trader purchased shares of Cooper. When the deal was announced the share price of Cooper increased by 41% compared to its prior day closing price. After liquidating his shares Mr. Ahmed had trading profits of about $1.1 million while Trader netted about $170,000. Each paid a portion of those profits to a firm controlled by Mr. Kanodia, apparently a Newman quid pro quo. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney for the District of Connecticut filed parallel criminal charges.
The initial complaint in Zeringue followed the same approach. The complaint named as defendants Scott Zeringue and Jessie Roberts. Mr. Zeringue was the vice president of construction operations at Shaw Group, Inc., an energy construction company. Mr. Roberts is his brother-in-law. The action centers on the acquisition of Shaw by Chicago Bridge & Iron on February 13, 2013. Prior to that time Mr. Zeringue learned of the then pending deal through his employment. He purchased 125 shares of Shaw, 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 and a relative of that person. Both traded. Overall Mr. Roberts had trading profits of $765,000 while the other traders profits totaled $154,000. Mr. Roberts paid his brother-in-law $30,000 for the tip, an allegation clearly intended to meet the Newman test.
Subsequently, the SEC 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 detail allegations focused on 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. While these allegations may meet the pre-Newman version of the personal benefit test, there is a clear absence of any quid pro quo claim here. The district court will thus be faced with a complaint which in part meets the Newman test and in part does not. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23215 (March 6, 2015).