Federal Jury Finds Traders Liable for Insider Trading in Test of SEC’s Post-Newman Strategy

March 4, 2016

On February 29, 2016, a Southern District of New York federal jury found former Euro Pacific Capital Inc. brokers Daryl Payton and Benjamin Durant liable for trading after receiving inside information about a $1.2 billion acquisition by IBM Corporation. The case, SEC v. Payton, Case No. 1:14-cv-04644, represented one of the first tests of the SEC’s insider-trading-civil-litigation strategy following the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. Dec. 10, 2014), cert. denied, 136 S. Ct. 242 (Oct. 5, 2015).


A.  Recent Changes to the Personal Benefit Requirement for Insider Trading

In Newman, the Second Circuit narrowed the scope of insider trading prosecutions by emphasizing the requirement that a tippee knew or should have known that the insider/tipper received a personal benefit for the tip and that to the extent that a personal benefit may be inferred from a personal relationship between the tipper and tippee, “the inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” Newman, 773 F.3d at 452.1

B.  Defendants’ Trading in SPSS

In May 2009, two months prior to IBM and SPSS Inc.’s public announcement of IBM’s proposed acquisition of SPSS, Trent Martin, then at a registered broker-dealer, learned material, nonpublic information regarding the pending SPSS acquisition (the “SPSS Acquisition”) from his close friend, Michael Dallas, an attorney at Cravath Swaine & Moore LLP. Martin misappropriated the information from Dallas, purchased SPSS securities on the basis of that information, and tipped that information to his friend and roommate, Thomas Conradt, who was a registered representative with a Connecticut-based registered broker-dealer (the “Broker”).

On or before July 1, 2009, Conradt tipped several other registered representatives associated with the Broker, including Defendants Payton and Durant, explaining that his roommate Martin had told him about the SPSS Acquisition. On the basis of that information, Durant and Payton separately purchased SPSS securities before the announcement of the SPSS Acquisition, and profited more than $53,000 and $290,000, respectively.

On July 28, 2009, IBM and SPSS issued a joint press release publicly announcing the proposed acquisition of SPSS by IBM, in an all cash transaction for approximately $1.2 billion.2

C.  Martin, Conradt, and Payton Pled Guilty to Criminal Insider Trading, But Convictions Thrown Out After Newman

Martin, Conradt, and Payton all pled guilty to criminal insider trading charges in November 2014. Following the December 2014 decision in Newman, however, Judge Andrew Carter in the Southern District of New York overturned their convictions and granted the government’s request to dismiss the criminal insider trading charges against them in January 2015.


Although the criminal convictions were vacated, the SEC brought a civil suit against Payton and Durant.

A. Judge Rakoff Denies Defendants’ Motion to Dismiss and Motion for Summary Judgment

Prior to the SEC trial, the Defendants sought, unsuccessfully, to have their case dismissed. Judge Rakoff denied Defendants’ motion to dismiss by concluding that the SEC had sufficiently alleged insider trading in the Amended Complaint. He specifically distinguished between the level of knowledge required for criminal insider trading as opposed to civil liability for insider trading: “[A] person is guilty of criminal insider trading only if that person committed the offense ‘willfully,’ i.e., knowingly and purposely, [whereas] a person may be civilly liable if that person committed the offense recklessly, that is, in heedless disregard of the probable consequences.” Subsequently, Judge Rakoff denied Defendants’ motion for summary judgment, concluding that even after Newman, a jury could conclude Defendants were civilly liable despite their denials of knowledge that Conradt received the information from Martin in exchange for a personal benefit.

B. Trial

At trial, the SEC sought to prove a personal benefit by showing that Martin provided the information to Conradt in exchange for all of the favors that Conradt had done for him including: sharing roommate expenses, negotiating rent reductions and assisting Martin with a criminal legal matter that jeopardized Martin’s ability to remain in the United States legally. Although both Payton and Durant each took the witness stand and claimed that they had invested in SPSS without knowing the source or certainty of the information, the jury did not credit their testimony and found both of them liable.

According to press reports, two of the jurors stated their belief that the roommate matters and legal assistance did not qualify as a benefit, but that the panel ultimately determined that Payton and Durant should have known about a possible benefit: “[Y]ou can’t just believe someone would give this kind of information without expecting a benefit.” Max Stendahl, SEC Scores Precarious Post-Newman Win In IBM Tip Trial, LAW360 (Mar. 1, 2016), http://www.law360.com/securities/articles/765523/sec-scores-precarious-post-newman-win-in-ibm-tip-trial.

The SEC is seeking disgorgement of more than $290,000 in ill-gotten gains, civil penalties, and a permanent injunction against present and future violations of Exchange Act Section 10(b) and Rule 10b-5.


The jury’s decision shows that the SEC can still successfully pursue insider trading cases in the post-Newman era and can prove the more restrictive personal benefit standard against tippees. We will continue to monitor this area of developing insider trading law.


1 On October 5, 2015, the Supreme Court denied the United States’ petition for review without comment. Separately, the Supreme Court granted review in Salman v. United States (No. 15-628) in order to consider whether it is enough that the insider and the tippee shared a close family relationship.

2 Martin and Conradt have since consented to civil judgments ordering injunctions and disgorgement of all ill-gotten gains, while the court ordered civil penalty determinations deferred until a later time.


If you have any questions regarding the matters covered in this memo, please contact Jack Yoskowitz or your primary attorney in Seward & Kissel’s Litigation Group.