Ex-Brokers Go on Trial in Test of Revised Insider Law

  • SEC says both men sought to make fast money in 2009 IBM deal
  • Defense lawyers say SEC will fail to meet new legal standard

Two former stockbrokers accused of insider trading by the U.S. Securities and Exchange Commission don’t deny making hundreds of thousands of dollars on a tip about a billion-dollar deal. They just deny they broke the law.

Insider trading laws are in flux following a 2014 federal appeals court ruling in New York that, in part, says prosecutors must show a source of a leak got some kind of a concrete benefit. The trial of Daryl Payton and Benjamin Durant tests the new requirement in a civil proceeding in New York for the first time.

To the SEC it’s all about greed. Payton and Durant sought to make a fast buck when they got information about International Business Machines Corp.’s $1.2 billion purchase of SPSS Inc. in July 2009, David Axelrod, an SEC lawyer, told a federal jury in Manhattan at the start of the trial on Tuesday.

The men’s lawyers argued the SEC’s case was built on a flimsy set of facts and would crumble. Both men were at a the end of a long tipping chain that included a lawyer who passed the information to his friend, that man’s roommate and a number of other people before it reached Payton and Durant. 

The connections were so tenuous, regulators won’t be able to prove Payton and Durant violated securities laws, the defense lawyers said.

“A person like Mr. Payton was so far removed from the source that this was like a game of telephone,” Sean Hecker, a lawyer for Payton, said in an opening statement. “If the SEC can’t prove its case and the chain breaks, the case falls apart.”

Rumored Deal

Durant traded on information about the deal but thought it was a rumor, said his lawyer, Scott Morvillo. Morvillo argued the SEC won’t be able to prove that either man knew what benefit, if any, the source got in exchange for the information.

“Simply trading on nonpublic information is not unlawful,” Morvillo said. “Ben was free to trade and the SEC won’t be able to prove this nonpublic information was improperly obtained or that it was exchanged for a personal benefit.”

Regulators say tips about IBM’s acquisition of SPSS started with a lawyer at Cravath, Swaine & Moore LLP, who told a friend, who passed it on to his roommate, who shared it with several other colleagues including Payton and Durant. The SEC says Durant made more than $629,472 while Payton earned more than $254,000.

“These men got information that was as good as gold,” Axelrod said in his opening statement to the jury. “They wanted to make big money fast, and they did. Despite knowing that trading on inside information was wrong, they let their own greed take over.”

Roommates Testify

Thomas Conradt and Trent Martin, the two roommates in the case who had settled with the SEC, agreed to testify at the trial, Axelrod said. Lawyers for Payton and Durant said their clients intend to take the stand and will refute the central elements of regulator’s case, saying they didn’t know who the source of the tips was, let alone what he got for the information.

Martin told Conradt about the IBM deal and in exchange got the apartment fixed up, according to the SEC.

“The apartment was in shambles,” Conradt testified Tuesday. “I did things, anything that increased the livability of the apartment. That included running over to Home Depot to get a new shower head, calling the building management company.”

The case is Securities and Exchange Commission v. Payton, 14-cv-04644, U.S. District Court, Southern District of New York (Manhattan).

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