By Matthew Garza, J.D.
The former chairman of medical equipment maker Home Diagnostics, Inc. continues to command attention from the SEC’s General Counsel through his efforts to have his 2012 insider trading guilty plea vacated. George Holley, the co-founder and chairman of Home Diagnostics, Inc., was sued by the SEC after tipping family and friends about his company’s upcoming merger with Nipro Corporation. Holley settled with the SEC in the New Jersey District Court on December 8, 2014, two days before the Second Circuit decided U.S. v. Newman. Holley failed to convince the district court that his plea should be vacated because Newman changed the law in his favor, and the SEC has now filed a brief in the appeal of that decision (SEC v. Holley, April 20, 2016).
Guilty plea. Holley pleaded guilty to criminal charges on August 8, 2012. In the criminal case, Holley pleaded guilty to two counts of insider trading by facilitating the profitable trading of his cousin and a close friend. The subsequent consent judgment with the SEC imposed a $386,000 penalty and a bar from serving as an officer or director of a public company. He moved to vacate the judgment on the argument that he received no personal benefit in return for his tip.
The district court found that although Holley may not have disclosed the anticipated merger in order to receive a tangible benefit in return, he acknowledged that the information was disclosed for the purpose of benefiting his friend and his cousin. This was precisely the type of circumstance that the Second Circuit anticipated when it held that a personal benefit was established by evidence of “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter],” said the court.
Brief. The SEC’s brief on appeal asserts that Newman did not change the law of the Second Circuit as it applies to Holley’s situation, and Holley’s FRCP 60(b) motion is in fact improperly attempting to affect that change. Even if Newman somehow changed the law of the Second Circuit on Exchange Act Section 10(b), the SEC wrote, it did not change the law of the Third Circuit, and furthermore, the conduct was illegal under separate provisions of the law—namely Exchange Act Section 14(e) and Rule 14e-3 on fraud related to tender offers. Those provisions make it unlawful to communicate material, nonpublic information about a tender offer even in the absence of a personal benefit.
The SEC also argued that Holley’s conduct was illegal even under the more stringent Newman standard because unlike the Newman defendants, Holley “orchestrated” the trading, in part by opening a brokerage account in another person’s name, seeding the account with $120,000, and arranging for trades.
Even if liability turned solely on Newman, the SEC continued, the conduct remains illegal because unlike Holley, the insiders in Newman tipped only casual acquaintances, not close friends or family members, and did not intend to benefit the people they tipped. “Ignoring that factual context, Holley reads Newman to hold that a ‘pecuniary or similarly valuable benefit’ is required in all tipping cases under Section 10(b),” and that view cannot be reconciled under either Newman or Dirks, asserted the brief. His activity is illegal under long standing precedent and remains so even after Newman, the SEC argued.
Finally, the SEC said that the district court acted within its discretion because Holley failed to demonstrate equitable factors justifying FRCP Rule 60(b) relief. “Equity does not entitle Holley to relitigate a defense he voluntarily abandoned in exchange for settlement, nor does equity favor permitting Holley to return to the boardrooms of public companies,” wrote the SEC.
The case is No. 15-3457.