SEC v Payton Rakoff Opinion April 6 2015

8/9/2019 SEC v Payton Rakoff Opinion April 6 2015

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -xSECURITIES AND EXCHANGE COMMISSION

P l a i n t i f f ,

DARYL M. PAYTON andBENJAMIN DURANT I I I ,

D e f e n d a n t s .- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

JED S. RAKOFF U . S . D . J .

14 Civ. 4644

OPINION AND ORDER

As a g e n e r a l m a t t e r , t h e r e i s n o t h i n g e s o t e r i c abou t

i n s i d e r t r a d i n g . I t i s a form o f c h e a t i n g , o f u s i n g p u r l o i n e d o r

embezz led i n f o r m a t i o n t o g a i n an u n f a i r t r a d i n g a d v a n t a g e . The

U n i t e s S t a t e s s e c u r i t i e s marke t s t h e c o m p a r a t i v e h o n e s t y o f

which i s one o f o u r n a t i o n s g r e a t b u s i n e s s a s s e t s - canno t

t o l e r a t e such c h e a t i n g i f t h o s e marke t s a r e t o r e t a i n t h e

c o n f i d e n c e o f i n v e s t o r s and t h e p u b l i c a l i k e .

But i f u n l a w f u l i n s i d e r t r a d i n g i s t o be p r o p e r l y d e t e r r e d ,

t must be a d e q u a t e l y d e f i n e d . The a p p r o p r i a t e body t o do so

one would t h i n k , i s Congress ; b u t i n t h e absence o f

C o n g r e s s i o n a l a c t i o n , s u c h d e f i n i t i o n h a s b e e n l a r g e l y l e f t t o

t h e c o u r t s . T h i s c r e a t e s d i f f i c u l t i e s , because c o u r t s must

p r o c e e d on a c a s e - b y - c a s e b a s i s . Somet imes t h o s e c a s e s a r e

c r i m i n a l p r o s e c u t i o n s , i n which c i r c u m s t a n c e a c o u r t i s o b l i g e d

t o d e f i n e u n l a w f u l i n s i d e r t r a d i n g n a r r o w l y s o a s t o p r o v i d e


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t h e f a i r n o t i c e t h a t due p r o c e s s r e q u i r e s b e f o r e a p e r s o n may be

p l a c e d i n j e o p a r d y o f impr i sonmen t . O t h e r t i m e s t h o s e c a s e s a r e

c i v i l p r o c e e d i n g s , most o f t e n b r o u g h t by t h e U.S. S e c u r i t i e s and

Exchange Commiss ion ( SEC ) , i n which c i r c u m s t a n c e a c o u r t i s

i n c l i n e d t o d e f i n e u n l a w f u l i n s i d e r t r a d i n g b r o a d l y, so a s t o

e f f e c t u a t e t h e r e m e d i a l p u r p o s e s b e h i n d t h e p r o h i b i t i o n o f such

t r a d i n g .

While t h e t e n s i o n s t h e r e b y c r e a t e d c a n n o t a lways be

r e s o l v e d i n s a t i s f a c t o r y f a s h i o n t h u s r e i n f o r c i n g t h e need f o r

C o n g r e s s i o n a l a c t i o n t h e y c a n t o some d e g r e e be m i t i g a t e d by

f o c u s i n g on d i f f e r e n c e s o f i n t e n t . S p e c i f i c a l l y , w h i l e a p e r s o n

i s g u i l t y o f c r i m i n a l i n s i d e r t r a d i n g o n l y i f t h a t p e r s o n

commi t t ed t h e o f f e n s e w i l l f u l l y , i . e . , knowing ly and

p u r p o s e l y, a p e r s o n may be c i v i l l y l i a b l e i f t h a t p e r s o n

commi t t ed t h e o f f e n s e r e c k l e s s l y , t h a t i s , i n h e e d l e s s d i s r e g a r d

o f t h e p r o b a b l e consequences . With r e s p e c t t o t h e mot ion h e r e

pend ing , t h a t d i s t i n c t i o n a r g u a b l y makes a d i f f e r e n c e .

I n t h i s c a s e , t h e Amended Compla in t a l l e g e s t h a t t h e

d e f e n d a n t s , D a r y l P a y t o n and Benjamin Duran t , I I I , u n l a w f u l l y

t r a d e d on m a t e r i a l n o n p u b l i c i n f o r m a t i o n r e g a r d i n g IBM's 2009

a c q u i s i t i o n o f SPSS, I n c . D e f e n d a n t s a s s e r t t h a t t h e r e c e n t l y

d e c i d e d Second C i r c u i t d e c i s i o n , U n i t e d S t a t e s v . Newman 773

F. 3 d 438 (2d C i r . 2014) , r e h g d e n i e d Nos. 13-1837 , 13-1917 (2d

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C i r . Apr. 3 , 2 0 1 5 ) , r e q u i r e s t h e Cour t t o d i s m i s s t h e SEC's

Amended Compla in t . The SEC r e s p o n d s t h a t t h e r e q u i r e m e n t s o f

Newman a r e i n a p p l i c a b l e h e r e and t h a t even i f t h e y a r e

a p p l i c a b l e t h e y a r e h e r e s a t i s f i e d by t h e Amended Compla in t .

The r e l e v a n t a l l e g a t i o n s o f t h e Amended Compla in t a r e as

f o l l o w s . 1 I n May 2009 , T r e n t M a r t i n , who was t h e n employed a t a

r e g i s t e r e d b r o k e r - d e a l e r i n New York, a c q u i r e d m a t e r i a l

n o n p u b l i c i n f o r m a t i o n r e g a r d i n g IBM's pend ing a c q u i s i t i o n o f

SPSS from h i s c l o s e f r i e n d Michae l D a l l a s . Amended Compla in t

( Am. Compl. ) 1 - 2 17, 48 . D a l l a s was an a s s o c i a t e a t a law

f i r m and had been a s s i g n e d t o work on t h e SPSS a c q u i s i t i o n . Id .

17. M a r t i n and D a l l a s had a h i s t o r y o f s h a r i n g c o n f i d e n c e s

s u c h t h a t a d u t y o f t r u s t and c o n f i d e n c e e x i s t e d be tween them.

Id . 30. They each u n d e r s t o o d t h a t t h e i n f o r m a t i o n t h e y s h a r e d

a b o u t t h e i r j o b s was n o n p u b l i c and b o t h e x p e c t e d t h e o t h e r t o

m a i n t a i n c o n f i d e n t i a l i t y . Id . 39 . I n l a t e May 2009 , D a l l a s

s h a r e d m a t e r i a l n o n p u b l i c i n f o r m a t i o n a b o u t t h e SPSS a c q u i s i t i o n

w i t h Mar t in , i n c l u d i n g i n f o r m a t i o n abou t t h e a n t i c i p a t e d

t r a n s a c t i o n p r i c e and t h e i d e n t i t i e s o f t h e a c q u i r i n g and t a r g e t

compan ie s . Id . 48. I n June and J u l y 2009 , D a l l a s c o n t i n u e d t o

1 For p u r p o s e s o f a mot ion t o d i s m i s s t h e Cour t must a c c e p t a l l w e l l - p l e a d e da l l e g a t i o n s o f f a c t a s t r u e and draws a l l r e a s o n a b l e i n f e r e n c e s i n f avo r o ft h e p l a i n t i f f . SE v . Apuzzo 689 F. 3 d 204, 207 (2d C i r . 2012) .

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communicate w i t h M a r t i n and s h a r e f u r t h e r m a t e r i a l n o n p u b l i c

i n f o r m a t i o n a b o u t t h e a c q u i s i t i o n . I d 52.

From October 2008 t h r o u g h November 2009, M a r t i n roomed w i t h

Thomas C o n r a d t , a l a w y e r and r e g i s t e r e d r e p r e s e n t a t i v e

a s s o c i a t e d w i t h a b r o k e r i n New York. I d 19, 56. They s h a r e d

a c l o s e , m u t u a l l y - d e p e n d e n t f i n a n c i a l r e l a t i o n s h i p , and had a

h i s t o r y o f p e r s o n a l f a v o r s . I d 56. Conrad t t o o k t h e l e a d i n

o r g a n i z i n g and p a y i n g s h a r e d expenses f o r t h e a p a r t m e n t ,

i n c l u d i n g p a y i n g b i l l s such a s c a b l e , i n t e r n e t , power, and

c l e a n i n g b i l l s ) . I d 57. He n e g o t i a t e d a r e n t r e d u c t i o n ,

r e n e g o t i a t e d t h e c a b l e b i l l f o r a 25 p e r c e n t s a v i n g s , h i r e d a

c l e a n i n g s e r v i c e , and a r r a n g e d f o r a p a r t m e n t r e p a i r s . I d 58.

Conrad t a l s o a s s i s t e d M a r t i n a f t e r M a r t i n was a r r e s t e d f o l l o w i n g

a s t r e e t a l t e r c a t i o n on June 20, 2009 and c h a rg e d w i t h c r i m i n a l

a s s a u l t . I d 59. S p e c i f i c a l l y , on June 22, 2009, f o u r days

b e f o r e he t r a d e d i n SPSS s e c u r i t i e s , Conrad t c a l l e d a f r i e n d who

was c l e r k i n g f o r a j udge t o a s k f o r a d v i c e on how M a r t i n s h o u l d

d e a l w i t h t h e a r r e s t . I d 60. D a l l a s , M a r t i n , Conrad t , and

C o n r a d t s f r i e n d t h e n d i s c u s s e d t h e b e s t l e g a l s t r a t e g y and

p o t e n t i a l a t t o r n e y s t o h i r e f o r M a r t i n . I d

About t h e same t ime , and, i n any e v e n t , p r i o r t o June 24,

2009, M a r t i n , i n v i o l a t i o n o f h i s d u t y o f t r u s t and c o n f i d e n c e

t o D a l l a s , t i p p e d i n s i d e i n f o r m a t i o n a b o u t t h e SPSS a c q u i s i t i o n


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t o C o n r a d t . I d 61. On June 26, 2009, C o n r a d t , on t h e b a s i s o f

t h e i n f o r m a t i o n , bough t SPSS s e c u r i t i e s . I d 62. About a month

l a t e r , i n a c o n v e r s a t i o n f o l l o w i n g t h e p u b l i c announcement o f

t h e SPSS a c q u i s i t i o n , M a r t i n t h a n k e d Conrad t f o r h i s p r i o r

a s s i s t a n c e w i t h t h e c r i m i n a l l e g a l m a t t e r and t o l d Conrad t he

was happy t h a t Conrad t p r o f i t e d from t h e SPSS t r a d i n g b e c a u s e

Conrad t had h e l p e d h im. I d 63.

Two o f C o n r a d t s co-worke r s a t t h e b r o k e r - d e a l e r company

where Conrad t worked were t h e two d e f e n d a n t s h e r e , Pay ton and

Duran t . I d 66. P r i o r t o J u l y 20, 2009, Conrad t had spoken

w i t h Pay ton and Duran t a b o u t h i s roommate, M a r t i n . I d 68. The

d e f e n d a n t s knew M a r t i n worked a t a s e c u r i t i e s f i r m , and Conrad t

had t o l d Pay ton a b o u t M a r t i n s a s s a u l t a r r e s t . I d

Around June 24, 2009, Conrad t d i v u l g e d t o a n o t h e r c o l l e a g u e

a t t h e f i rm where he worked - r e f e r r e d t o i n t h e Amended

Compla in t a s R e g i s t e r e d R e p r e s e n t a t i v e #1 ( RRl ) - t h e i n s i d e

i n f o r m a t i o n a b o u t t h e SPSS a c q u i s i t i o n . I d 69. Around J u l y 1,

2009, Conrad t l e a r n e d t h a t RRl had , i n t u r n , s h a r e d t h e i n s i d e

i n f o r m a t i o n w i t h d e f e n d a n t s Pay ton and Duran t . I d 70. Conrad t

t h e n p e r s o n a l l y t o l d t h e d e f e n d a n t s t h a t h i s roommate M a r t i n had

t o l d him abou t t h e SPSS a c q u i s i t i o n . I d Knowing t h a t Conrad t

was M a r t in s roommate , Pay ton and Duran t d i d n o t a s k why Mar t in

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t o l d C o n r a d t and t h e y d i d n o t a s k how M a r t i n l e a r n e d t h e

i n f o r m a t i o n . I d

On t h e b a s i s o f t h e i n s i d e i n f o r m a t i o n t h e y l e a r n e d from

RRl and C o n r a d t d e f e n d a n t s p u r c h a s e d SPSS s e c u r i t i e s . I d

75 77. On J u l y 28 2009 t h e day o f t h e p u b l i c announcement

C o n r a d t d e f e n d a n t Duran t and RRl met f o r l unch t o d i s c u s s

t h e i r t r a d i n g i n SPSS. I d 81. They p l a n n e d a f u r t h e r m e e t i n g

a t a h o t e l t h a t e v e n i n g and Duran t p a i d f o r t h e l u n c h i n c a s h

s t a t i n g he d i d n o t want t o l e a v e a p a p e r r e c o r d . I d Tha t

even ing C o n r a d t d e f e n d a n t Pay ton d e f e n d a n t Duran t RRl and

a n o t h e r i n d i v i d u a l t i p p e d by Conrad t David Weishaus met a t a

h o t e l t o d i s c u s s what t h e y s h o u l d do i f any o f them were

c o n t a c t e d by t h e SEC o r o t h e r law enfo rcement . I d 82. They

a g r e e d n o t t o d i s c u s s t h e t r a d i n g w i t h anyone and t o c o n t a c t a

l awyer i f q u e s t i o n e d . I d

I n August 2009 P a y t o n t r a n s f e r r e d a l l h i s h o l d i n g s from

a c c o u n t s h e l d by h i s employe r t o a n o t h e r f i r m . I d 83. I n

o r d e r t o a v o i d c o n t r o l s t h a t t h a t f i r m had i n p l a c e f o r

m o n i t o r i n g members o f t h e s e c u r i t i e s i n d u s t r y , P a y t o n f a l s e l y

r e p r e s e n t e d t o t h a t f i r m t h a t he was engaged i n r e a l e s t a t e

c o n s u l t i n g . I d I n November upon r e c e i p t o f an SEC subpoena

t h e d e f e n d a n t s employe r p l a c e d t h e d e f e n d a n t s i n s e p a r a t e rooms

and q u e s t i o n e d them a b o u t t h e i r SPSS t r a d i n g , a t which t ime b o t h


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d e f e n d a n t s l i e d a b o u t t h e o r i g i n o f t h e i r i n t e r e s t i n SPSS

s e c u r i t i e s . I d 84.

On t h e b a s i s o f t h e f o r e g o i n g a l l e g a t i o n s , t h e SEC c h a rg e s

t h e d e f e n d a n t s w i t h v i o l a t i n g t h e g e n e r a l a n t i f r a u d p r o v i s i o n s

o f t h e s e c u r i t i e s l aws s p e c i f i c a l l y , S e c t i o n lO(b) o f t h e

S e c u r i t i e s Exchange Act o f 1934 and Rule lOb-5 promulga ted

t h e r e u n d e r by engag ing i n i n s i d e r t r a d i n g . As n o t e d e a r l i e r ,

t h e l aw on i n s i d e r t r a d i n g h a s b e e n l a r g e l y deve loped by t h e

c o u r t s and b a s i c a l l y r e s t s on two l e g a l t h e o r i e s . Under t h e

c l a s s i c a l t h e o r y, an i n s i d e r who, i n b r e a c h o f h i s f i d u c i a r y

d u t y t o h i s company o r i t s s h a r e h o l d e r s , e i t h e r t r a d e s f o r

h i m s e l f on t h e b a s i s o f h i s company s m a t e r i a l n o n p u b l i c

i n f o r m a t i o n o r p r o v i d e s t h e i n f o r m a t i o n t o an o u t s i d e r ( t h e

t i p p e e ) i n r e t u r n f o r some p e r s o n a l b e n e f i t , t h e r e b y d e f r a u d s

h i s company and i t s s h a r e h o l d e r s , a s does a co- schemer such a s

t h e t i p p e e . Under t h e m i s a p p r o p r i a t i o n t h e o r y, an o u t s i d e r

( i . e . , n o t p a r t o f t h e company whose s t o c k i s t o be t r a d e d ) who

embezz le s m a t e r i a l n o n p u b l i c i n f o r m a t i o n from h i s employe r o r

o t h e r s o u r c e o f i n f o r m a t i o n i n b r e a c h o f a d u t y owed t o t h e

s o u r c e o f t h e i n f o r m a t i o n and t h e n e i t h e r t r a d e s on t o r , i n

r e t u r n f o r a b e n e f i t , p r o v i d e s t f o r t r a d i n g p u r p o s e s t o a

t i p p e e , t h e r e b y d e f r a u d s t h e s o u r c e , a s does a co- schemer such

a s t h e t i p p e e .

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Problems a r i s e however, when a p p l y i n g t h e s e t h e o r i e s t o

t r a d i n g on such i n f o r m a t i o n by s o - c a l l e d r emote t i p p e e s t h a t

i s p e r s o n s o t h e r t h a n t h e immed ia t e t i p p e e . S i n c e t h e r e a r e

l e g i t i m a t e r e a s o n s why an i n s i d e r migh t d i s c l o s e i n s i d e

i n f o r m a t i o n t o an o u t s i d e r e . g . a w h i s t l e b l o w e r d i s c l o s i n g a

f r a u d , o r s imply an e x e c u t i v e c a r r y i n g o u t h i s company 's p o l i c y

o f p r i m i n g t h e marke t by making d i s c l o s u r e s t o a n a l y s t s b e f o r e

a p u b l i c announcement t h e Supreme Cour t l ong ago d e t e r m i n e d

t h a t no f r a u d has o c c u r r e d i n t h e c l a s s i c a l s i t u a t i o n u n l e s s t h e

i n s i d e r i s r e c e i v i n g a p e r s o n a l b e n e f i t f o r d i s c l o s i n g t h e

i n f o r m a t i o n . i r k s v . SEC 463 U.S. 646, 662 (1983) .

A c c o r d i n g l y, i n Newman a c a s e a g a i n s t a r emote t i p p e e premised

on t h e c l a s s i c a l t h e o r y o f i n s i d e r t r a d i n g t h e Second C i r c u i t

h e l d t h a t t h e r emote t i p p e e i n o r d e r t o be c r i m i n a l l y l i a b l e

had t o be aware t h a t t h e o r i g i n a l t i p p e r had r e c e i v e d a b e n e f i t

f o r d i s c l o s i n g t h e i n s i d e i n f o r m a t i o n f o r o t h e r w i s e t h e remote

t i p p e e would n o t know whethe r he was p a r t i c i p a t i n g i n a f r a u d o r

n o t .

S p e c i f i c a l l y t h e Cour t i n Newman s t a t e d t h a t a t i p p e e

(whe the r immed ia t e o r remote) c o u l d , u n d e r t h e c l a s s i c a l t h e o r y,

o n l y be p r o s e c u t e d f o r t r a d i n g on i n s i d e i n f o r m a t i o n where t h e

f o l l o w i n g e l e m e n t s were proved :

(1) t h e c o r p o r a t ef i d u c i a r y d u t y ; (2)

i n s i d e r was e n t r u s t e d w i t h at h e c o r p o r a t e i n s i d e r b r e a c h e d h i s

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f i d u c i a r y d u t y by a) d i s c l o s i n g c o n f i d e n t i a li n f o r m a t i o n t o a t i p p e e b) i n exchange f o r a p e r s o n a lb e n e f i t ; 3) t h e t i p p e e knew o f t h e t i p p e r ' s b r e a c h ,t h a t i s , he knew t h e i n f o r m a t i o n was c o n f i d e n t i a l andd i v u l g e d f o r p e r s o n a l b e n e f i t ; and 4 ) t h e t i p p e es t l l used t h a t i n f o r m a t i o n t o t r a d e i n a s e c u r i t y o rt i p a n o t h e r i n d i v i d u a l f o r p e r s o n a l b e n e f i t .

Newman 773 F. 3 d a t 450.

The SEC a rg u e s t h a t a d i s t i n c t i o n from t h e s e r e q u i r e m e n t s

shou ld be made when t comes t o a remote t i p p e e o f i n s i d e

i n f o r m a t i o n t h a t was o b t a i n e d by m i s a p p r o p r i a t i o n , because ( i n

c o n t r a s t t o d i s c l o s u r e by an i n s i d e r ) t i s d i f f i c u l t t o imagine

any l e g i t i m a t e j u s t i f i c a t i o n f o r d i s c l o s u r e o f m a t e r i a l

nonpub l i c i n f o r m a t i o n by an o u t s i d e r , who i s n o t p a r t o f t h e

company whose s t o c k i s t r a d e d b u t has been e n t r u s t e d w i t h

c o n f i d e n t i a l i n f o r m a t i o n abou t t h e company by way o f a d u t y o f

t r u s t and c o n f i d e n c e t o t h e s o u r c e o f t h e i n f o r m a t i o n .

T h e r e f o r e , t h e argument goes , a remote t i p p e e ' s knowledge t h a t

t h e i n s i d e i n f o r m a t i o n emanated from an a c t o f m i s a p p r o p r i a t i o n

shou ld be s u f f i c i e n t t o charge t h e r emote t i p p e e , f o r t i s t h e

e q u i v a l e n t o f knowledge t h a t t h e t i p p e e i s t h e knowing r e c i p i e n t

o f s t o l e n p r o p e r t y.

Whatever t h e a b s t r a c t m e r i t s o f t h i s a rgumen t , t h e Second

C i r c u i t , i n Newman s t a t e d u n e q u i v o c a l l y t h a t [ t ] h e e lements o f

t i p p i n g l i a b i l i t y a r e t h e same, r e g a r d l e s s o f whethe r t h e

t i p p e r ' s d u t y a r i s e s under t h e ' c l a s s i c a l ' o r t h e


10/16

' m i s a p p r o p r i a t i o n ' t h e o r y. Newman 773 F. 3 d a t 446. Newman t h e n

s e t f o r t h t h e s t a n d a r d quo ted above r e q u i r i n g b o t h b e n e f i t t o

t h e t i p p e r and t h e t i p p e e ' s knowledge o f t h e b e n e f i t . Id . a t

450. While a p u r i s t migh t r e g a r d t h e s e s t a t e m e n t s a s d i c t a

s i n c e t h e y were n o t t e c h n i c a l l y n e c e s s a r y t o t h e r e s o l u t i o n o f

t h e c a s e i n Newman which i n v o l v e d a c l a s s i c a l t h e o r y o f i n s i d e r

t r a d i n g n o n e t h e l e s s , t h e s e s t a t e m e n t s seem so c l e a r l y i n t e n d e d

t o g i v e gu idance t o t h e lower c o u r t s o f t h i s C i r c u i t t h a t t h i s

Cour t t a k e s them a s b i n d i n g .

On t h a t b a s i s , t h e d e f e n d a n t s t h e n a s s e r t t h a t t h e Amended

Complain t must be d i s m i s s e d because t h e y a rg u e t f a i l s t o

a d e q u a t e l y a l l e g e e i t h e r t h a t t h e o r i g i n a l t i p p e r , h e r e Tr e n t

M a r t i n r e c e i v e d a p e r s o n a l b e n e f i t f o r d i s c l o s i n g i n f o r m a t i o n

t o h i s immedia te t i p p e e , Thomas Conrad t o r t h a t t h e d e f e n d a n t s

had knowledge o f t h a t p e r s o n a l b e n e f i t .

In Dirks a c i v i l c a s e t h e Supreme Court d e f i n e d a

p e r s o n a l b e n e f i t a s

a p e c u n i a r y g a i n o r a r e p u t a t i o n a l b e n e f i t t h a t w i l lt r a n s l a t e i n t o f u t u r e e a r n i n g s . For examplet h e r e may be a r e l a t i o n s h i p be tween t h e i n s i d e r andt h e r e c i p i e n t t h a t s u g g e s t s a q u i d p r o quo from t h el a t t e r , o r an i n t e n t i o n t o b e n e f i t t h e p a r t i c u l a r

r e c i p i e n t .The

e l e m e n t s o ff i d u c i r y

d u t y ande x p l o i t t i o n o f n o n p u b l i c i n f o r m a t i o n l s o e x i s t whenan i n s i d e r makes a g i f t o f c o n f i d e n t i l i n f o r m a t i o n t oa t r a d i n g r e l t i v e o r f r i e n d .

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D i r k s 463 U.S. a t 663-64 (emphas is s u p p l i e d ) . t i s a rg u a b l y

u n c l e a r whethe r t h e i t a l i c i z e d s e n t e n c e m o d i f i e s t h e p r i o r

r e f e r e n c e t o p e c u n i a r y g a i n o r f u t u r e e a r n i n g s , o r i s an

i n d e p e n d e n t , s t a n d - a l o n e p o s s i b i l i t y . However, i n Newman a

c r i m i n a l c a s e , t h e Second C i r c u i t h e l d t h a t , t o t h e e x t e n t D i r k s

s u g g e s t s t h a t a b e n e f i t may be i n f e r r e d f rom a p e r s o n a l

r e l a t i o n s h i p , such an i n f e r e n c e i s i m p e r m i s s i b l e i n t h e absence

o f p r o o f o f a m e a n i n g f u l l y c l o s e p e r s o n a l r e l a t i o n s h i p t h a t

g e n e r a t e s an exchange t h a t i s o b j e c t i v e , c o n s e q u e n t i a l , and

r e p r e s e n t s a t l e a s t a p o t e n t i a l g a i n o f a p e c u n i a r y o r s i m i l a r l y

v a l u a b l e n a t u r e . 773 F. 3 d a t 452. Whether t h i s i s t h e r e q u i r e d

r e a d i n g o f D i r k s may n o t be o b v i o u s , 2 and i t may n o t be so e a s y

f o r a l ower c o u r t , which i s bound t o f o l l o w b o t h d e c i s i o n s , t o

r e c o n c i l e t h e two. N e v e r t h e l e s s , t h e C o u r t need n o t c o n f r o n t

t h a t d i f f i c u l t y h e r e , f o r i t c o n c l u d e s t h a t , f o r p u r p o s e s o f

t h i s SEC c i v i l enfo rcement a c t i o n , t h e Amended Compla in t

a d e q u a t e l y meets any d e f i n i t i o n o f b e n e f i t s e t f o r t h i n e i t h e r

D i r k s o r Newman.

2 D i r k s s t a t e s t h a t t h e r e a r e o b j e c t i v e f a c t s and c i r cums tances t h a t o f t e nj u s t i f y such an i n f e r e n c e [o f p e r s o n a l b e n e f i t ] and t h e n l i s t s a number o fd i f f e r e n t r e l a t i o n s h i p - t y p e s a s examples . D i r k s 463 U.S. a t 664 . I n l i s t i n gthem a s examples , t h e D i r k s d e c i s i o n seems t o d i s t i n g u i s h a q u i d p r o quor e l a t i o n s h i p f rom i n s t a n c e s where an i n s i d e r makes a g i f t o f c o n f i d e n t i a li n f o r m a t i o n t o a r e l a t i v e o r f r i e n d ; w h e r e a s , t h e Newman d e c i s i o n s u g g e s t st h a t t h e l a t t e r t y p e o f r e l a t i o n s h i p ( i . e . mere f r i e n d s h i p ) can l e a d t o ani n f e r e n c e o f p e r s o n a l b e n e f i t o n l y where t h e r e i s e v i d e nce t h a t i t i sg e n e r a l l y a k i n t o q u i d p r o quo. Compare i d . w i t h Newman 773 F. 3 d a t 452 .


12/16

S p e c i f i c a l l y , a p p l y i n g t h e more onerous s t a n d a r d o f b e n e f i t

s e t f o r t h i n Newman t h e f i r s t i s s u e i s whethe r t h e SEC has

s u f f i c i e n t l y a l l e g e d t h a t M a r t i n , t h e t i p p e r , r e c e i v e d a

p e r s o n a l b e n e f i t f o r d i s c l o s i n g m a t e r i a l n o n p u b l i c i n f o r m a t i o n

a b o u t t h e SPSS a c q u i s i t i o n t o Conrad t . 3 The Amended Compla in t

a l l e g e s t h a t M a r t i n and Conrad t s h a r e d a c l o s e m u t u a l l y -

dependen t f i n a n c i a l r e l a t i o n s h i p , and had a h i s t o r y o f p e r s o n a l

f a v o r s . Am Compl. 56 . To s u b s t a n t i a t e t h i s o t h e r w i s e

c o n c l u s o r y s t a t e m e n t , t h e SEC a l l e g e s t h a t t h e i r e x p e n s e s were

i n t e r t w i n e d , t h a t Conrad t t ook t h e l e a d i n o r g a n i z i n g and

i n i t i a l l y p a y i n g t h e i r s h a r e d e x p e n s e s , and t h a t he n e g o t i a t e d

r e d u c t i o n s i n t h e i r u t i l i t i e s and r e n t payments . Id . 57-58 .

Even more i m p o r t a n t l y , Conrad t a s s i s t e d M a r t i n w i t h a c r i m i n a l

l e g a l m a t t e r t h a t t h r e a te n e d M a r t i n 's a b i l i t y t o r ema in l e g a l l y

i n t h e U n i t e d S t a t e s , i d . 59, and s u b s e q u e n t l y, Mar t in

thanked Conrad t f o r h i s p r i o r a s s i s t a n c e w i t h t h e c r i m i n a l l e g a l

3 Because a l l e g a t i o n s o f i n s i d e r t r a d i n g sound i n f r aud , t h e c o m p l a i n t i sg e n e r a l l y s u b j e c t t o t h e h e i g h t e n e d p l e a d i n g s t a n d a r d s o f Fed . R. Civ. P.9 ( b ) . See Newman 773 F. 3 d a t 445 ( [ I ] n s i d e r t r a d i n g i s a t y p e o f s e c u r i t i e sf r a u d . ) ; SEC v . C o l l i n s Aikman C o r p . 524 F. Supp. 2d 477, 484 (S.D.N.Y.2007) . However, t h e SEC a s s e r t s t h a t t h e s t a n d a r d s u n d e r Rule 9(b) a r er e l a x e d i n t h e c o n t e x t o f i n s i d e r t r a d i n g b e c a u s e i n s i d e r t i p s a r e t y p i c a l l yp a s s e d on i n s e c r e t and i t i s o f t e n i m p r a c t i c a l t o r e q u i r e p l a i n t i f f s t oa l l e g e t h e s e d e t a i l s w i t h p a r t i c u l a r i t y . SEC v . One o r more Unknown Tr a d e r si n S e c u r i t i e s o f Onyx Pharma. I n c . No. 13 Civ. 4645 , 2014 WL 5026153, a t *4

(S.D.N.Y. Sep t . 29, 2 0 1 4 ) . Th i s C o u r t f i n d s t h a t where m a t t e r s a r ep e c u l i a r l y w i t h i n t h e [ d e f e n d a n t s ' ] knowledge , s l i g h t l y r e l a x e d p l e a d i n g

s t a n d a r d s a r e a p p r o p r i a t e . Sega l v. Gordon 467 F.2d 602, 608 (2d C i r . 1972) .However, where t h e f a c t s a l l e g e d a r e n o t w i t h i n d e f e n d a n t s ' knowledge , t h e

Cour t w i l l a p p l y t h e u s u a l s t a n d a r d s e t f o r t h u n d e r Rule 9 ( b ) .

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m a t t e r and t o l d Conrad t he was happy t h a t Conrad t p r o f i t e d from

t h e SPSS t r a d i n g because Conrad t had h e l p e d h im. Id . 63.

Al though t h i s c o n v e r s a t i o n o c c u r r e d more t h a n a month a f t e r t h e

i n s i d e r t r a d i n g i n q u e s t i o n , t h e Cour t , drawing ( a s r e q u i r e d )

e v e r y r e a s o n a b l e i n f e r e n c e i n p l a i n t i f f ' s f a v o r , f i n d s t h a t t

i s i n d i c a t i v e M a r t i n ' s i n t e n t t o b e n e f i t Conrad t a t t h e t ime o f

d i s c l o s u r e o f t h e i n f o r m a t i o n , a s w e l l a s e v i d e n c e o f a q u i d p r o

quo r e l a t i o n s h i p . See Newman 773 F. 3 d a t 452; s e e a l s o Uni t ed

S t a t e s v . R i l e y No. 13 Cr. 339-1 , 2015 W 891675, a t *5

(S.D.N.Y. Mar. 3, 2015) ( I f a t i p m a i n t a i n s o r f u r t h e r s a

f r i e n d s h i p , and i s n o t s imply i n c i d e n t a l t o t h e f r i e n d s h i p , t h a t

i s c i r c u m s t a n t i a l e v i d e n c e t h a t t h e f r i e n d s h i p i s a q u i d p r o quo

r e l a t i o n s h i p . ) . More g e n e r a l l y , t a k i n g a l l t h e f a c t s i n t h e

c o m p l a i n t a s t r u e and drawing a l l r e a s o n a b l e i n f e r e n c e s i n f a v o r

o f t h e SEC t h e Amended Compla in t more t h a n s u f f i c i e n t l y a l l e g e s

t h a t M a r t i n and Conrad t had a m e a n i n g f u l l y c l o s e p e r s o n a l

r e l a t i o n s h i p and t h a t M a r t i n d i s c l o s e d t h e i n s i d e i n f o r m a t i o n

f o r a p e r s o n a l b e n e f i t s u f f i c i e n t t o s a t i s f y t h e ewman

s t a n d a r d . See Newman 773 F. 3 d a t 452.

The Amended Compla in t a l s o a l l e g e s t h a t t h e d e f e n d a n t s had

knowledge o f a b e n e f i t s u f f i c i e n t t o meet t h e c i v i l s t a n d a r d o f

knowing o r r e c k l e s s . While t h e r e i s no a l l e g a t i o n t h a t t h e

d e f e n d a n t s knew s p e c i f i c a l l y a b o u t C o n r a d t ' s h e l p t o M a r t i n on

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14/16

t h e c r i m i n a l c h a rg e , t h e Amended Compla in t does a l l e g e , i n t e r

a l i a t h a t t h e d e f e n d a n t s (a) knew t h a t M a r t i n was t h e s o u r c e o f

t h e t i p t o Conrad t , Am Compl. 69-74 ; (b) knew t h a t Conrad t

and M a r t i n were f r i e n d s and roommates, i d . 68; and (c) knew

( a t l e a s t i n t h e c a s e o f d e f e n d a n t Payton) o f M a r t i n ' s a s s a u l t

a r r e s t , i d . T h i s i s enough t o r a i s e t h e r e a s o n a b l e i n f e r e n c e

t h a t t h e d e f e n d a n t s knew t h a t M a r t i n ' s r e l a t i o n s h i p w i t h Conrad t

i n v o l v e d r e c i p r o c a l b e n e f i t s .

Fur the rmore , d e f e n d a n t Duran t r e p e a t e d l y a s k e d Conrad t i f

M a r t i n had g i v e n him any more i n f o r m a t i o n , i d . 74, i n d i c a t i n g

t h a t he knew t h a t Conrad t and M a r t i n had c l o s e enough

r e l a t i o n s h i p t h a t t h e y would c o n t i n u e t o exchange i n s i d e

i n f o r m a t i o n abou t t h e SPSS a c q u i s i t i o n . And C o n r a d t , f o r h i s

p a r t , c o n t i n u e d t o p r o v i d e d e f e n d a n t s w i t h more s p e c i f i c

i n f o r m a t i o n abou t t h e a c q u i s i t i o n , i n c l u d i n g r e a s s u r a n c e a s t o

i t s v a l i d i t y , t h e names o f t h e p a r t i e s t o t h e t r a n s a c t i o n , t h a t

t h e t r a n s a c t i o n would happen soon, and t h a t t h e i n f o r m a t i o n came

from C o n r a d t ' s roommate, M a r t i n . I d . 74.

F u r t h e r s t i l l i n c o n t r a s t t o t h e f a c t s i n Newman where

t h e d e f e n d a n t s knew n e x t t o n o t h i n g a b o u t t h e t i p p e r s , were

unaware o f t h e c i r c u m s t a n c e s o f how t h e i n f o r m a t i o n was

o b t a i n e d , and d i d n o t know what t h e r e l a t i o n s h i p be tween t h e

[ t i p p e r ] and t h e f i r s t - l e v e l t i p p e e was , 773 F. 3 d a t 453-54,

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t h e Amended Compla in t h e r e a l l e g e s t h a t t h e d e f e n d a n t s knew t h e

b a s i c c i r c u m s t a n c e s s u r r o u n d i n g t h e t i p . t f u r t h e r a l l e g e s t h a t

t h e d e f e n d a n t s r e c k l e s s l y a v o i d e d d i s c o v e r i n g a d d i t i o n a l

d e t a i l s . D e s p i t e t h e i r marke t s o p h i s t i c a t i o n and t h e i r knowledge

t h a t Conrad t l e a r n e d t h e i n f o r m a t i o n f rom M a r t i n , t h e y d i d no t

a s k Conrad t why M a r t i n s h a r e d t h e i n s i d e i n f o r m a t i o n o r how

M a r t i n l e a r n e d o f i t i n t h e f i r s t p l a c e . I d 70. The Cour t may

draw an a d v e r s e i n f e r e n c e f rom t h e i r c o n s c i o u s avo idance o f

d e t a i l s abou t t h e s o u r c e o f t h e i n s i d e i n f o r m a t i o n and n a t u r e o f

t h e i n i t i a l d i s c l o s u r e . SEC v . Obus 693 F. 3 d 276, 288-89 (2d

C i r . 2012) ( [T] ippee l i a b i l i t y may a l s o r e s u l t from consc ious

a v o i d a n c e . ) ; SEC v . M u s e l l a 678 F. Supp. 1060, 1063 (S.D.N.Y.

1988) ( f i n d i n g t h a t downst ream t i p p e e s s h o u l d have known abou t a

b r e a c h o f a du ty, b u t t h a t t h e y d i d n o t a s k [ abou t t h e s o u r c e

o f i n f o r m a t i o n ] because t h e y d i d n o t want t o know ) .

s f u r t h e r e v i d e n c e o f d e f e n d a n t s ' knowledge t h a t t h e

i n s i d e i n f o r m a t i o n was t h e p r o d u c t o f a b r e a c h o f du ty,

d e f e n d a n t s t o o k m u l t i p l e s t e p s t o c o n c e a l t h e i r own t r a d i n g i n

SPSS s e c u r i t i e s . Defendan t Duran t a v o i d e d l e a v i n g a p a p e r t r a i l

a t a l unch mee t ing w i t h Conrad t , i d 81; d e f e n d a n t s met w i t h

o t h e r t i p p e e s and a g r e e d n o t t o d i s c u s s t h e i r t r a d i n g w i t h

anyone e l s e , i d 82; d e f e n d a n t P a y t o n t r a n s f e r r e d h i s

h o l d i n g s , i n c l u d i n g h i s SPSS h o l d i n g s , t h a t were h e l d w i t h h i s

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employe r t o a n o t h e r b r o k e r a g e f i r m and m i s r e p r e s e n t e d h i m s e l f t o

be engaged i n r e a l e s t a t e c o n s u l t i n g t o a v o i d any c o n t r o l s t h e

new f i r m may have had i n p l a c e f o r m o n i t o r i n g members o f t h e

s e c u r i t y i n d u s t r y, i d 83; and when q u e s t i o n e d , d e f e n d a n t s

l i e d t o t h e i r employe r a b o u t t h e o r i g i n s o f t h e i r i n t e r e s t i n

SPSS s e c u r i t i e s , i d 84.

Thus t a k i n g t h e s e a l l e g a t i o n s a s t r u e and drawing a l l

r e a s o n a b l e i n f e r e n c e s i n f a v o r o f t h e SEC t h e Amended Compla in t

more t h a n s u f f i c i e n t l y a l l e g e s t h a t d e f e n d a n t s knew o r

r e c k l e s s l y d i s r e g a r d e d t h a t M a r t i n r e c e i v e d a p e r s o n a l b e n e f i t

i n d i s c l o s i n g i n f o r m a t i o n t o Conrad t and t h a t M a r t i n i n do ing

so b r e a c h e d a d u t y o f t r u s t and c o n f i d e n c e t o t h e owner o f t h e

i n f o r m a t i o n . Newman 773 F. 3 d a t 450.

A c c o r d i n g l y f o r t h e f o r e g o i n g r e a s o n s , d e f e n d a n t s mot ion

t o d i s m i s s t h e Amended Compla in t i s h e r e b y d e n i e d . The C l e r k o f

t h e C o u r t i s d i r e c t e d t o c l o s e d o c k e t number 28.

SO ORDERED.

Dated : New York Y

A p r i l 6 2015

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SEC v Payton Rakoff Opinion April 6 2015