Does SEC’s Stunning Trial Loss Make It Harder for Agency to Bring insider Trading Cases?

The SEC experienced a rare trial loss in an insider-trading case, with the court finding that the agency’s statistical evidence was too speculative...

The Securities and Exchange Commission (SEC) experienced a rare trial loss in an insider-trading case, with the court finding that the agency’s statistical evidence was too speculative. At this point, it is unclear whether the decision will impact the SEC’s insider trading enforcement strategy or is simply an outlier.

SEC’s Insider Trading Charges

According to the SEC’s complaint, defendant Christopher Clark was involved in an insider-trading scheme involving the securities of CEB Inc. (CEB) before CEB and Gartner, Inc. (Gartner) announced on January 5, 2017 that Gartner would acquire CEB for $2.6 billion. The SEC alleged that Clark was tipped about the potential merger by his brother-in-law, co-Defendant William Wright, who served as CEB’s corporate controller at the time. Based on the information tipped by Wright, Clark allegedly purchased highly speculative, out-of-the-money call options and directed his son to purchase the same options in the son’s account. The scheme generated $296,000 in illicit profits, according to the SEC.

In support of the allegations, the SEC cited “highly suspicious trading” that had been detected by the agency’s market surveillance tool. It also pointed to conversations between Clark and Wright by phone, text, and in-person, including while Clark coached their daughters’ basketball team and at family holiday events, which often immediately preceded Clark’s trading.

Court Dismisses Insider Trading Case

In October, Wright reached a settlement with the SEC without admitting or denying the complaint’s allegations and agreed to pay a $240,000 fine. Clark, meanwhile, proceeded to trial.

On December 13, 2021, U.S. District Judge Claude M. Hilton dismissed the case after the close of the SEC’s evidence, concluding that the agency had failed to provide sufficient evidence that Clark obtained confidential information and acted on it. “There’s just simply no circumstantial evidence here that gives rise to an inference that he received the insider information,” Judge Hilton said, according to court transcripts. 

According to Judge Hilton, the frequent communication between Clark and his brother-in-law did not prove that material nonpublic information was exchanged. “Of course he would talk to his brother-in-law, and vice versa,” the judge said. Judge Hilton was also not convinced by the SEC’s argument that Clark financed the transactions by borrowing money, opening credit lines, and mortgaging his car. “I mean, you could quibble how somebody raised a few dollars, but this wasn’t a man who was desperate for money,” Judge Hilton said. “At all times during this entire situation and before, his assets far exceeded his liabilities.”

Judge Hilton also didn’t agree that Clark’s “improbable success rate” proved he had the benefit of insider information. “It’s just a matter of speculation,” Judge Hilton said. “I mean, the government can speculate that he made a little too much money, he was a little too successful or more successful than he ought to be, so therefore he’s getting insider information, but there’s no evidence of it.”

Key Takeaway

The SEC has certainly won cases based on less evidence. So, it remains to be seen whether Judge Hilton’s decision is an anomaly or whether other courts will become more critical of the SEC’s use of statistical evidence. Nonetheless, this is a potential legal trend that certainly warrants careful monitoring.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.