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From Securities Regulation Daily, January 23, 2015

No ordinary ‘dicta’ impels judge to scotch insider guilty pleas

By Mark S. Nelson, J.D.

Four individuals who pleaded guilty to insider trading won a reprieve from a federal judge who vacated their earlier pleas and instead entered pleas of not guilty for them in a criminal insider trading case that stems from IBM’s acquisition of statistical software maker SPSS, Inc. (SPSS). Judge Andrew L. Carter, Jr. said in a three-page order that he was “swayed” by what some may call dicta in the Second Circuit’s December 2014 Newman opinion, which he said implied that tipping liability is governed by the same standards no matter if it is based on the classical or misappropriation theories of insider trading (U.S. v. Conradt, January 22, 2014, Carter, A.).

Drive to settle Second Circuit law. Judge Carter said Newman was an effort by the Second Circuit to unify that circuit’s insider trading law. Specifically, he pointed to one sentence from Newman equating the classical and misappropriation theories.

The Second Circuit in Newman had clarified that in order for the government to get a conviction in an insider trading case, it must prove that a tippee knew an insider disclosed confidential information and he did this for a personal benefit. Because the jury instruction in Newman failed to include this language, the court vacated the convictions won by the government against two hedge fund analysts. The Newman court also told the district court to dismiss the related indictments with prejudice on remand.

Early last week, the government offered its views on Newman’s impact in its related insider trading case against another alleged IBM-SPSS trader, Benjamin Durant. According to prosecutors, Newman was a classical insider trading case and its excursions into the misappropriation theory of insider liability are unpersuasive here. Specifically, the government said Newman’s one-sentence remark on the equivalence of classical and misappropriation cases added nothing to the elements for cases based on the misappropriation theory.

“It would be incorrect to read more into this one sentence than it can logically bear. Beyond merely restating clearly established law, it is also surely dicta inasmuch as it has no bearing on, and no connection with, Newman’s twin holdings concerning the benefit standard, and the requisite knowledge of the benefit by a tippee, in the classical context,” said prosecutors.

In essence, Judge Carter’s observation here about Newman boiled down to a contest between Newman’s dicta and dicta the judge cited in a footnote to his order vacating Thomas Conradt’s, David Weishaus’s, Trent Martin’s, and Daryl Payton’s guilty pleas. Judge Carter said in the footnote that Newman found the cases cited by the government there (i.e., arguing that Second Circuit misappropriation cases do not require a personal benefit to the tipper) were consistent with that court’s contrary holdings. Judge Carter’s footnote also said the government’s reliance on the Second Circuit’s Libera opinion was inapt because the First Circuit, in SEC v. Sargent, had read Libera’s mention of a benefit not being required in misappropriation cases as being no more than dicta.

By contrast, Judge Carter said forceful dicta deserve great weight. “Accordingly, even assuming arguendo that the Government is correct that the cited language in Newman is dicta, it is not just any dicta, but emphatic dicta which must be given the utmost consideration.” According to Judge Carter, the Newman “dicta” is forceful enough to vacate some guilty pleas made under pre-Newman Second Circuit law.

Judge signaled plea ruling. The government based its case against Conradt, Weishaus, Martin, Payton, and Durant on a chain of tippers and tippees that took root in the offices of a big New York City-based law firm. According to the government, an attorney known only as “Attorney-1” at that law firm, who also worked on the IBM-SPSS deal, allegedly tipped Martin, a research analyst at a financial services firm, that IBM was to make an above-market price offer to acquire SPSS.

Martin then told his friend and roommate, Conradt, about the IBM-SPSS deal. Conradt in turn let Weishaus, Payton, Durant, and someone identified in court filings only as “CC-1,” a co-conspirator, of the impending acquisition. Durant, Payton, Weishaus, and CC-1 allegedly profited handsomely from their purchase of SPSS call options, while Martin and Conradt gained much less than the others from their purchases of SPSS common stock. All told, the defendants here made over $1 million from their trades.

Judge Carter’s decision to vacate the four guilty pleas put an explanation point on a result that was much anticipated. Little more than a week after the Second Circuit issued its Newman opinion, the judge had indicated he was leaning towards vacating Conradt’s, Weishaus’s, Martin’s and Payton’s pleas. In yesterday’s order, Judge Carter emphasized that federal criminal procedure rules imbue him with authority to vacate guilty pleas prior to entering a judgment, if the pleas lack a strong enough factual basis.

Government’s next move in Newman. The government zealously argues that the Second Circuit got Newman wrong. As the government told Judge Carter in a January 12 brief, it believes the Second Circuit’s opinion may deprive it of the ability to prosecute a large swath of insider trading cases and that the opinion runs counter to Supreme Court precedent. The government’s latest arguments to Judge Carter also echo those of Manhattan U.S. Attorney Preet Bharara from the day the Second Circuit issued Newman.

“The decision affects only a subset of our recent cases, and in those cases—as in all our criminal cases—we investigated and prosecuted misconduct based on our good faith assessment and understanding of the facts and the law that existed at the time. We are still assessing the Court’s decision, which appears in our view to narrow what has constituted illegal insider trading, and are considering our options for further appellate review,” said Bharara last December.

The government recently won a 30-day extension of the time it has to decide if it will seek panel and en banc rehearing of the Newman case in the Second Circuit. The government was due to make its decision today. As of publication, the court’s docket did not yet reflect prosecutors’ next move in the Newmancase, but widely published reports said prosecutors have asked the Newman panel and the full Second Circuit to rethink the decision.

What’s next for Durant. Judge Carter was to hold a status conference today on Durant’s and Payton’s motion to dismiss the indictment against them in the IBM-SPSS case. Durant pleaded not guilty in that case and had recently asked the court to dismiss the indictment against him in light of the Second Circuit’sNewman opinion. Durant had been set to go on trial February 23. As of publication, the court had not indicated the result of today’s hearing.

The case is No. 12 Cr. 887.

Attorneys: Catherine L. Redlich (Driscoll & Redlich) for Thomas C. Conradt. Michael John Grudberg (Ballard Spahr LLP) for David J. Weishaus. Larry Howard Krantz (Krantz & Berman LLP) for Trent Martin. Peggy Cross-Goldenberg (Federal Defenders of New York Inc.) for Benjamin Durant.  James Michael Roth (Stampur & Roth) and Lloyd Epstein (Epstein and Weil) for Daryl Payton. A. Damian Williams, United States Attorney’s Office for the USA.

Companies: International Business Machines; SPSS, Inc.

MainStory: TopStory NewYorkNews Enforcement FraudManipulation

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