The US District Court for the Southern District of New York recently denied two defendants’ motion to dismiss a Securities and Exchange Commission complaint alleging that they committed insider trading, holding that the complaint adequately pleaded a receipt of personal benefit to the tipper as required by the US Court of Appeals for the Second Circuit’s recent decision in U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014).

The SEC alleged that, in 2009, defendants Daryl M. Payton and Benjamin Durant III received tips regarding IBM’s imminent acquisition of SPSS Inc. and purchased securities relying on those tips, earning about $290,000 from the trades. According to the complaint, the tip originated from a lawyer working on the transaction who tipped a friend, Trent Martin; Martin then tipped his roommate, Thomas Conradt, who ultimately tipped the defendants. The SEC alleged that Martin had received personal benefits from Conradt in exchange for the tips, including arranging legal help for Martin when he was arrested for assault. The US Attorney for the Southern District of New York previously filed parallel criminal charges against Payton and Durant, but dropped those charges after determining they could not meet the Second Circuit’s standard for personal benefits in insider trading cases as articulated in Newman.

The District Court held that the SEC properly pleaded that Payton and Durant committed insider trading. The District Court found that the finances of the defendants’ tippee, Conradt and Conradt’s tippee, Martin, were “intertwined,” that they had a “quid pro quo relationship,” and that the defendants knew of the relationship and that Martin was Conradt’s source of the information. Additionally, the District Court determined that, in contrast to Newman, the complaint adequately pleaded that the defendants knew, or recklessly avoided discovering, that the tip originated from a breach of duty.

SEC v. Payton et. al., No. 1:14-cv-04644-JSR (S.D.N.Y. April 6, 2015).

Daniel Ketani is the co-author of this article.