By Mark S. Nelson, J.D.
Respondent Charles Hill took the SEC to federal court over the agency’s initiation of an administrative proceeding charging him with tender offer fraud arising from NCR Corporation’s acquisition of Radiant Systems, Inc. only to find the court house doors shut on jurisdictional grounds. But the administrative process Hill complained of has worked to his advantage now that an SEC administrative law judge has dismissed the in-house case the Enforcement Division brought against Hill under Exchange Act Section 14(e) and Rule 14e-3 (In the Matter of Charles L. Hill, Jr., File No. 3-16383, April 18, 2017).
SEC’s theory of case. The SEC’s administrative case against Hill depended on the agency establishing that Hill knew or had reason to know that he traded in Radiant stock based on material, nonpublic information (MNPI) obtained from Radiant’s COO, Andrew Heyman, via their mutual friend, artist Todd Murphy. The SEC emphasized the relationships between A. Heyman, Murphy, and Hill, while de-emphasizing the connections between Radiant’s then-CEO, John Heyman (A. Heyman’s older brother), and Hill, whose children knew each other.
Hill placed multiple buy orders for Radiant stock in what the SEC believed to be suspiciously well-timed purchases at key stages of the NCR-Radiant merger talks followed by Hill’s twin sales of Radiant stock four days after the merger was publicly announced. Hill’s trades involved over 101,000 Radiant shares (8,600 of them in accounts for Hill’s daughters) and garnered Hill a total gain of $740,000.
Agency’s evidence falls apart. The Enforcement Division’s case against Hill began to unravel as the ALJ repeatedly found A. Heyman, Murphy, and Hill credible, while finding Hill’s broker, Lynn Carter, to be “easily the least believable witness who testified …” after she was evasive about why she completed a brokerage account application in a manner that reflected her view of what Hill’s investment strategy should be rather than what Hill told her he wanted to invest in.
Testimony showed that A. Heyman, Murphy, and Hill frequently communicated by telephone or text messaging, but there was scant evidence that MNPI flowed from A. Heyman through Murphy to Hill. For example, the ALJ found Murhpy’s communications patterns matched what was typical for him before and after the merger talks. There also was little evidence that A. Heyman was incautious about compliance with Radiant’s insider trading policy or with avoiding discussing business when faced with potentially risky social situations; the ALJ credited A. Heyman’s testimony that he did not pass MNPI to Murphy.
Prior to the 2011 NCR-Radiant merger talks, Hill had not bought stock of any kind for four years, although he did buy some Radiant shares in 2001. Hill and Murphy were “close friends” for over 20 years and Hill sometimes loaned money to Murphy. Hill also had other ties to Radiant, such as helping the company’s CFO to locate a restaurant site (Hill’s real estate development business focused on leasing commercial properties to chain restaurants). As for the brokerage application, Hill said he could have reviewed it more carefully because it contained some inconsistent information. When asked why he bought Radiant shares, Hill explained that he had followed Radiant in Atlanta’s major newspaper and not because of any recommendations by financial advisers.
The matter is No. 3-16383.