`Mishegas' New Insider-Trading Standards Weighed by Jury

  • Judge calls personal benefit test `mishegas' -- or crazy
  • Two brokers sued by SEC for trading ahead of 2009 IBM deal

A New York federal jury is deliberating an insider-trading case testing new standards the government now must meet -- standards the judge called “mishegas,” or crazy.

The U.S. Securities and Exchange Commission insider-trading lawsuit against two former brokers is the first to test whether the U.S. can meet a 2014 standard set by a federal appeals court in New York that narrows the definition of benefit. The appeals court said the prosecutors and regulators must prove the trader knew the source of insider information got something concrete in exchange, which the judge said now gives a defense to cheaters.

“The SEC has a hard burden here,” U.S. District Judge Jed Rakoff told lawyers Feb. 25, outside the presence of the jury. “If I were writing the law -- which fortunately for the nation I’m not -- I would eliminate all this personal benefit mishegas, which has led to a situation where a lot of people who are rather blatantly and obviously engaging in a form of cheating, which is what fraud is really about, now have a defense.”

The SEC sued Benjamin Durant and Daryl Payton, both formerly of Euro Pacific Capital Inc., for trading ahead of International Business Machines Corp.’s $1.2 billion purchase of SPSS Inc. in July 2009, with Durant making more than $629,000 on the trades while Payton made more than $254,000.

Lawyer Leaked

The inside information originated from a lawyer working on the deal and went through a number of people before finally reaching Durant and Payton, according to the SEC. During the trial, the jury heard from the former lawyer and his friend Trent Martin who the SEC says took the IBM information. Martin later passed it to his roommate, Thomas Conradt, who shared it with his Euro Pacific colleagues, including Payton and Durant. 

To meet the higher standard of proof, the SEC argued that within days of getting the tip, Conradt provided Martin with benefits, such as reducing his rent, hiring a cleaning lady and getting the apartment’s leaky roof fixed.

Payton and Durant took the stand during the trial, saying they traded on the tip but both men testified they didn’t know what benefit, if any, the source of the IBM information got.

"The SEC’s case is all smoke," Matthew Fisbein, Payton’s lawyer, told jurors in closing arguments Friday. "The SEC can’t fill the hole of what was in Darryl Payton’s head," he said.

Convictions Overturned

The appeals court ruling, which overturned the insider-trading convictions of fund managers Todd Newman and Anthony Chiasson, prompted U.S. Attorney Preet Bharara to drop a criminal case against Payton, Durant and three others. Bharara also dropped or had convictions overturned in seven other insider-trading cases.

Appellate courts have split on the question of what kind of a "personal benefit" a tipster must get for leaking information. Rakoff is also the author of a ruling in an insider trading case decided by a California federal appeals court which is now being reviewed by the U.S. Supreme Court.

In that case, Rakoff ruled that a conviction of an Illinois man, who traded on merger tips he got from a relative, could be upheld if the inside information was intended as a gift. Rakoff heard that appeal while sitting as a visiting judge. The Supreme Court’s decision in the California case should resolve the dispute over what constitutes a benefit.

"I once referred to the law in this area as Delphic and the Second Circuit said, ‘shut up,’" he told lawyers during the Feb. 25 hearing.

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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