Fact Issues Over Duty, Benefit Found in IBM Insider Case

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By Phyllis Diamond

Dec. 28 — There are material, disputed factual questions regarding whether Australian stock trader Trent Martin owed a duty of trust and confidence to Michael Dallas, the corporate lawyer who told him about IBM Corp.'s confidential plans to acquire SPSS Inc. in 2009, the U.S. District Court for the Southern District of New York said Dec. 28 (SEC v. Payton, S.D.N.Y., No. 14 Civ. 4644, 12/28/15).

It also isn't clear whether Martin received a personal benefit for tipping his roommate Thomas Conradt to the inside information—or that Conradt's downstream tippees Daryl Payton and Benjamin Durant knew the information was confidential and that Martin received a personal benefit for disclosing it—Judge Jed Rakoff said.

In September, Rakoff turned back a summary judgment motion by Payton and Durant to dismiss Securities and Exchange Commission insider trading allegations (177 SLD, 9/14/15). In this case, the court explained its reasons for the ruling.

Motion Based on Newman

Payton and Durant based their motion on the U.S. Court of Appeals for the Second Circuit's decision in United States v. Newman throwing out the insider trading convictions of two former hedge fund managers (238 SLD, 12/11/14). In that case, the appeals court said the prosecution didn't prove that the defendants—both downstream tippees—knew that an insider had disclosed confidential information in exchange for a personal benefit.

In the wake of the ruling, U.S. Attorney Preet Bharara asked the court to dismiss criminal insider charges against five men, including Payton and Durant, citing the inability to meet Newman's “novel evidentiary bar.” Payton and Durant then moved to dismiss the related SEC civil action (37 SLD, 2/25/15), but the court allowed the civil suit to proceed (67 SLD, 4/8/15). In the wake of that ruling, the defendants moved for summary judgment; in September, Rakoff denied their motion.

Genuine Dispute

Explaining his decision, he said a jury must decide whether Martin breached a duty of trust and confidence to Dallas. “To be sure, there is competing evidence,” Rakoff wrote. “[A]ll this means is that the matter is genuinely disputed.

Summary judgment also isn't warranted on the question of whether Martin received a personal benefit for disclosing the information to Conradt. According to Rakoff, a reasonable jury could conclude that the defendants deliberately didn't ask about the circumstances in which Martin passed the information to Conradt “in order to remain technically ignorant of whether Conradt received a personal benefit, because they well understood that there was a high probability that just such a benefit had been provided.”

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@@bna.com