Wednesday, December 30, 2015

Tippees Didn't Look Too Closely at Source of Confidential Information

By Rodney F. Tonkovic, J.D.

A district court has denied a motion for summary judgment brought by alleged remote tippees in an insider trading action brought by the SEC. The court found that it was reasonably likely that the tippees were aware that the original tipper had received a benefit for disclosing the inside information. This opinion sets out the reasons behind the court's order denying summary judgment on September 10, 2015 (SEC v. Payton, December 28, 2015, Rakoff, J.).

The Commission alleged that Daryl Payton and Benjamin Durant, III, unlawfully traded on material nonpublic information regarding IBM's 2009 acquisition of SPSS, Inc. Before the 2009 acquisition, Michael Dallas, an attorney working on the deal passed nonpublic information in confidence to a close friend, Trent Martin, who then passed the information to his roommate, Thomas Conradt, a registered representative associated with a broker. Conradt, in turn, shared the information with some of his colleagues, including Payton and Durant. According to the Commission, Payton and Durant proceeded to trade on the information by purchasing SPSS securities and call options, collectively making over $290,000.

Breach of duty. The Commission pursued this case under the misappropriation theory under which fraud is committed when confidential information is misappropriated in breach of a duty owed to the information's source. The court found that there were reasonable disputes of material fact regarding whether Martin owed and breached a duty of trust and confidence to Dallas. The evidence showed that the two friends repeatedly shared confidential information, but also that there was an expectation that the information would be kept amongst themselves.

Personal benefit. Summary judgment was also unwarranted as to the issue of whether Martin received a personal benefit for disclosing the information to Conradt. The court noted that it had previously held that the benefit requirement is satisfied by a tipper's intention to benefit the tippee, and no quid pro quo is required. The evidence in this case, however, satisfied even a quid pro quo requirement due to the closeness of the relationship between Martin and Conradt. A reasonable juror, the court said, could conclude that Martin intended to benefit Conradt and, further, that the passing along of the SPSS information was effectively a quid pro quo for favors Conradt had done for Martin.

The court then found that a jury could reasonably find that Payton and Durant understood that there was a high probability that Martin had passed confidential information to Conradt in exchange for a personal benefit. The record showed that Payton and Durant knew, among other information, that the information came from Martin and that Martin and Conradt were friends. Payton and Durant, however, did not press Conradt for more on the source of the tip, suggesting that they understood how the SPSS information was obtained, but consciously chose to remain technically ignorant of whether Conradt received a benefit. For these reasons, the court denied Payton and Durant's motion for summary judgment.

The case is No. 14 Civ. 4644.