Ex-Broker’s $980K SEC Fine Gets Review After Criminal Case Falls

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By Andrew Ramonas

A former stockbroker whose guilty plea to criminal insider trading charges was vacated is hoping to beat a related civil penalty of almost $1 million when a federal appeals court hears his case, which could clarify the reach of two high-profile insider decisions.

Thomas Conradt is slated to argue Aug. 15 that Judge Jed Rakoff of the U.S. District Court for the Southern District of New York should have overturned his civil insider trading settlement with the Securities and Exchange Commission after his criminal case was dropped. Conradt also will dispute the “massive and disproportionate” fine Rakoff imposed after deciding that he didn’t comply with the terms of the settlement agreement.

Conradt’s criminal case was withdrawn after the U.S. Court of Appeals for the Second Circuit in United States v. Newman made it harder to hold “downstream tippees” like him liable.

In Conradt’s case, the Second Circuit may shed light on how Newman and a later U.S. Supreme Court decision altered the scope of insider trading liability, lawyers told Bloomberg BNA.

Personal Benefit

In Newman, the appeals court threw out the insider trading convictions of two former hedge fund executives. It said the government didn’t prove that the source of the information received a personal benefit for disclosing it and that the two men knew about the benefit. The Supreme Court later held in Salman v. United States that a personal benefit can be based on a gift of information to a trading friend or relative.

“This is a very important opportunity for the Second Circuit to clarify the ‘knowledge’ standard for tippee liability with respect to matters such as ‘conscious avoidance,’ and to address the differences in standard of proof in civil as opposed to criminal cases,” Georgetown University Law Center professor Donald Langevoort, who has written about insider trading, told Bloomberg BNA. “ Newman’s knowledge standard seemed clearly directed at criminal cases, without saying so explicitly.”

Columbia Law School professor John Coffee Jr., who also has studied insider trading, told Bloomberg BNA the case may not provide much guidance on Newman, however.

“This case may largely duck the insider trading issues and go off on procedural issues about the plea agreement,” he said.

Cooperation Agreement

In 2013, Conradt pleaded guilty in his criminal case and separately settled a related SEC civil enforcement action. In the civil case, Conradt agreed to disgorge the $2,533 he allegedly made trading on a roommate’s tips about International Business Machines Corp.’s planned 2009 acquisition of SPSS Inc. Conradt also tipped colleagues at Euro Pacific Capital Inc. about the $1.2 billion deal to purchase the software company, according to the government.

The SEC also agreed not to seek a civil penalty beyond $2,533, to be decided at a later date, in exchange for Conradt’s assistance in the ongoing litigation. Rakoff, however, agreed with the commission that Conradt breached his cooperation agreement by “intentionally watering down” his deposition testimony several months later at the trial of two alleged tippees and ordered him to dole out $980,229 instead.

Conradt claimed in his brief to the Second Circuit that the “supposed discrepancies” in his later testimony were inconsequential in the context of the trial, “and far below where other courts have held that a cooperator breached cooperation agreements” ( SEC v. Conradt , 2d Cir., No. 15-02967, appellant brief 1/23/17 ). The SEC said in its brief that Rakoff correctly concluded that Conradt’s “purported memory lapses were not credible” and “that his evasive testimony was material” ( SEC v. Conradt , 2d Cir., No. 15-02967, appellee brief 3/9/17 ).

The Second Circuit has affirmed almost all of Rakoff’s 14 securities cases it has reviewed, according to Bloomberg Law’s Litigation Analytics. The court reversed only one case and reversed another case in part.

Oral Argument

The SEC likely will tell the Second Circuit Conradt didn’t abide by the terms of his cooperation agreement, his lawyer, Justin Santagata, told Bloomberg BNA. The New Jersey attorney said he will focus on Rakoff’s refusal to withdraw the settlement. The purported breach of the deal wouldn’t matter if the judge had thrown it out, Santagata said.

“Once Mr. Conradt pled guilty, he really had no choice but to enter the cooperation agreement,” Santagata said. “Once Newman came down and changed the law on insider trading to a pretty significant extent, Mr. Conradt had a right to vacate his cooperation agreement.”

He added: “If you look at the SEC’s brief and you compare it to ours, basically they’re upside down. That’s essentially what’s going to happen on the appeal.”

Santagata’s appearance at the Second Circuit will mark the first time he’s argued before the court. The Kaufman Semeraro & Leibman LLP associate in Fort Lee, N.J., previously participated in about eight to 10 oral arguments in New Jersey’s Appellate Division.

He will face David Lisitza, a senior litigation counsel in the appellate group of the SEC’s Office of General Counsel, court records show. Lisitza wrote briefs for Newman and Salman, according to his online biography.

An SEC spokesman declined to comment.

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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