The SEC's Quiet Insider-Trading Loss

Sometimes it makes sense to challenge the Securities and Exchange Commission.

The Southern District of New York's 79-0 undefeated streak over the past five years in insider-trading prosecutions has drawn plenty of notice. Here's a reminder that beating the government isn't always impossible.

Last week, the big news on the insider-trading beat was the conviction of former SAC Capital Advisors LP fund manager Mathew Martoma. The government spared no effort to make sure everyone heard the news.

Meanwhile, two days beforehand, the Securities and Exchange Commission quietly posted a one-paragraph disclosure on its website noting it had lost a civil insider-trading trial the week before against an Illinois farmer and his three sons. The men were accused of misusing confidential information to trade ahead of the 2007 purchase of Florida East Coast Industries Inc., where one of the sons worked.

The trial of Rex C. Steffes, Cliff M. Steffes, Bret W. Steffes and Rex R. Steffes lasted nine days, by which point the SEC's publicity machine had long since thoroughly tarred them.

After filing its original complaint against the men, the agency issued a news release in 2010 with the headline "SEC Charges Family Insider Trading Ring in Million-Dollar Scheme." The release quoted the director of the SEC's Chicago regional office, Merri Jo Gillette, who said the defendants had "exploited their personal and family relationships for monetary gain" and that "their misuse of confidential information gave them an illegal advantage over other traders in the market."

That isn't how a federal jury in Chicago saw it. The jurors returned their verdict in favor of the defendants on Jan. 27, more than three years after the SEC sued them. But the SEC didn't issue a news release with a splashy headline to trumpet their vindication, only the brief item on Feb. 4 noting the matter for the record.

One of the morals of the story is that sometimes it pays to fight the government. Originally there were six defendants in this case, all family members. Two of them settled, without admitting or denying the SEC's allegations. Robert Steffes agreed in 2010 to pay about $226,000 in fines, interest and disgorgement. Gary Griffiths agreed in 2012 to a $120,000 fine. Maybe they would have won if they had taken the SEC to trial. They will never know.

But remember their predicaments the next time you see the SEC settle with someone it has accused of violating the law. To neither admit nor deny the government's claims isn't the same as a guilty plea. The SEC didn't prove anything.

One more thought: It would be nice to see the SEC one day adopt a policy under which it pledges to provide the same level of publicity to exonerations of defendants as it does to accusations against them. It's only fair.

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