The appeal of Daryl Payton and Benjamin Durant was not granted in a decision by a federal jury in Manhattan for trading on confidential tips about an IBM Corp acquisition.
The decision found that the two brokers were liable for trading on inside information about a $1.2 billion IBM acquisition in a closely watched test of the U.S. Securities and Exchange Commission's enforcement powers.
U.S. District Judge Jed Rakoff told the counsels that the SEC has a hard burden.
"If I were writing the law -- which fortunately for the nation I'm not -- I would eliminate all this personal benefit mishegas, which has led to a situation where a lot of people who are rather blatantly and obviously engaging in a form of cheating, which is what fraud is really about, now have a defense," the judge stated.
Brokers Payton and Durant conceded in the Manhattan court that they traded on non-public information about IBM's 2009 acquisition of SPSS Inc for US$1.2 billion. But, they alleged that trading on non-public information alone is not a violation of the nation's security laws.
They further stated that U.S. Securities and Exchange Commission (SEC) was wrong to press claims that they broke the law, a position the defendants adopted after a recent appeals court ruling limited the reach of insider trading laws
The two were early reported being part of a group of five who all received a tip in 2009 to trade on SPSS prior to an IBM deal announcement. Both Payton and Durant pleaded not guilty. They were arrested and subsequently released after paying a total bond of $500,000.
The ruling involved the cases of hedge fund managers Todd Newman and Anthony Chiasson which favored them after they filed an appeal. Newman and Chiasson successfully argued that the trading should not be considered illegal if no benefit was taken by the tipper.
The case is filed as No. 14-04644, Securities and Exchange Commission v. Payton et al at the U.S. District Court, Southern District of New York. The civil case will be tried under U.S. District Judge Jed Rakoff.
As adopted in the SEC new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues.
Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability.
The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.
Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.
