Sec. & Exch. Comm'n v. Payton

• Decision Date: 28 November 2016
• Docket Number: 14 Civ. 4644
• Citation: 219 F.Supp.3d 485
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Daryl M. PAYTON, and Benjamin Durant, III, Defendants.
• Court: U.S. District Court — Southern District of New York

219 F.Supp.3d 485

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Daryl M. PAYTON, and Benjamin Durant, III, Defendants.

14 Civ. 4644

United States District Court, S.D. New York.

Signed November 28, 2016

A. Kristina Littman, Catherine Eleni Pappas, G. Jeffrey Boujoukos, David Lawrence Axelrod, U.S. Securities and Exchange Commission, Philadelphia, PA, Sharon Blaskey Binger, Scott A. Thompson, Securities & Exchange Commission, Philadelphia, PA, for Plaintiff.

Peter Simpson Ross, Sean Hecker, Kaitlin Teresa Farrell, Matthew E. Fishbein, Rushmi Bhaskaran, Debevoise & Plimpton LLP, New York, NY, Ada Fernandez Johnson, Jonathan Rosser Tuttle, Laura Emily O'Neill, Debevoise & Plimpton LLP (DC), Washington, DC, Noam B. Greenspan, Petrillo Klein & Boxer LLP, New York, NY, Gregory Robert Morvillo, E. Scott Morvillo, Nicole Renee Lloret, Robert Craig Morvillo, Morvillo LLP, New York, NY, Eugene Edward Ingoglia, United States Attorney's Office, New York, NY, for Defendants.

OPINION AND ORDER

JED S. RAKOFF, United States District Judge.

On February 29, 2016, following a seven-day trial, a jury found defendants Daryl M. Payton and Benjamin Durant, III civilly liable for insider trading. See Verdict, ECF No. 136. At the close of evidence, defendants Payton and Durant moved for judgment as a matter of law pursuant to Fed. R. Civ. P. 50(a). See Trial Transcript ("Trial Tr.") at 880–89. The Court denied the motion. Id. at 889. Defendants Payton and Durant now move for judgment as a matter of law pursuant to Fed. R. Civ. P. 50(b), or, in the alternative, for a new trial pursuant to Fed. R. Civ. P. 59. Defendants also seek amendment of the penalties imposed against them. For the reasons stated below, the Court hereby denies defendants' motion, except for one change in the penalties.

The factual background and procedural history of this case have been recounted in several prior opinions of this Court, familiarity with which is here presumed.¹ To briefly summarize, the SEC pursued this case under the "misappropriation" theory of insider trading. See generally United States v. O'Hagan , 521 U.S. 642, 651–59, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997). In 2009, Michael Dallas, a transactional lawyer working for IBM's outside law firm, learned in that capacity that IBM planned to acquire SPSS, Inc. ("SPSS"). Dallas then told his friend Trent Martin about the SPSS acquisition, but although this disclosure was made in strict confidence, Martin tipped his friend and roommate Thomas Conradt, and Conradt in turn tipped defendants Payton and Durant, who traded on the information.

Under Rule 50, "a court may set aside the verdict only if there exists such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or the evidence in favor of the movant is so overwhelming that reasonable and fair minded persons could not arrive at a verdict against it." Cash v. Cty. of Erie , 654 F.3d 324, 333 (2d Cir. 2011) (internal quotation marks omitted). In analyzing a Rule 50 motion, a court must review the entire record and draw all reasonable inferences in favor of the non-movant. Reeves v. Sanderson Plumbing Prods., Inc. , 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000). "Thus, although the court should review the record as a whole, it must disregard all evidence favorable to the moving party that the jury is not required to believe," and should "give credence to the evidence favoring the nonmovant." Id. at 151, 120 S.Ct. 2097 (internal quotation marks omitted).

The standard under Rule 59 is similarly strict. "A motion for a new trial ordinarily should not be granted unless the trial court is convinced that the jury has reached a seriously erroneous result or that the verdict is a miscarriage of justice." Townsend v. Benjamin Enters., Inc. , 679 F.3d 41, 51 (2d Cir. 2012).

Under Second Circuit law as it stood at the time of trial, the SEC was required to prove "(1) that Martin owed a duty of trust and confidence to the source of the material non-public information about the SPSS transaction, namely, Dallas; (2) that Martin breached that duty by disclosing the confidential SPSS information to Conradt; (3) that Martin received a personal benefit from disclosing the information to Conradt; and (4) that Conradt's tippees, defendants Payton and Durant, understood both that the SPSS information was confidential and that Martin had disclosed this information to Conradt in exchange for a personal benefit." See Payton , 155 F.Supp.3d at 431.

In their instant motions, defendants raise four main challenges to the verdict, all of them similar to arguments the Court effectively rejected when it denied defendants' pre-trial motions for summary judgment and held that a reasonable jury could find defendants liable for insider trading. See id. at 431–34. Given the facts the jury could reasonably have found—both from the SEC's affirmative evidence and from the adverse inferences the jury was entitled to draw from the inconsistent testimony and doubtful demeanor of the defense witnesses—the Court has no difficulty in rejecting these arguments anew.

First , defendants argue that Martin did not breach a duty of trust and confidence he owed to Dallas. More precisely, defendants argue that no legally cognizable confidential duty arose in the first place. But under Rule 10b5–2 (and as the jury was instructed), a duty of trust and confidence arises "[w]henever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality [.]" 17 C.F.R. § 240.10b5–2(b)(2). The jury's finding that Martin owed Dallas such a duty is supported by abundant evidence.

To begin with, the excerpts of the Dallas and Martin videotaped deposition transcripts that were played to the jury showed clearly that Dallas and Martin enjoyed a close relationship of trust and confidence, including sharing private and sensitive matters about their careers, salaries, friends, and romantic partners. See, e.g. , Deposition Transcript of Trent Martin ("Martin Tr.") at 43–46; 116–31; Deposition Transcript of Michael Dallas ("Dallas Tr.") at 41–44, 62–66, 77–81. Against this background, Dallas shared details about the SPSS transaction with Martin because Dallas, a young associate, was "apprehensive" about being assigned to work on a high-profile deal for a major client under the direction of a "fearsome" partner, and wanted Martin's support and reassurance. Dallas Tr. at 69–70, 77–80, 133–135; Martin Tr. 49–51. Dallas expected that Martin would keep the SPSS information to himself, Dallas Tr. at 81–82, and, as even Martin confirmed (Martin Tr. at 61–63), Dallas felt so angry when he learned that Martin had traded on the information that he insisted that Martin unwind the trades before the SPSS transactions was announced (Dallas Tr. at 78–82, 90–93, 142).

Given all this and given their prior history of sharing in confidence private, even intimate, details about their personal and professional lives, the jury could readily have concluded that it was more likely than not that Martin knew, or had reason to know, that Dallas expected him to keep the SPSS information confidential.

True, there was conflicting evidence. In particular, Martin claimed that he initially had the impression that Dallas expected him to trade on the SPSS information. Martin Tr. at 57. Martin also sent Dallas an ambiguous, if suggestive, text message reading, "I'm going to hit that stock, I reckon." Trial Tr. at 394; Dallas Tr. at 205–07. But given the foregoing evidence that Martin knew or had reason to know that Dallas expected him to keep the information in confidence but simply chose to disregard it for his own selfish reasons, the jury easily could have rejected any conflicting evidence and concluded that Martin owed Dallas a confidential duty. It is not the function of a court on a Rule 50 motion to re-weigh evidence or assess credibility. Reeves , 530 U.S. at 150–51, 120 S.Ct. 2097.²

Second , defendants argue that there was insufficient evidence from which a rational juror could conclude that Martin received a personal benefit in exchange for tipping Conradt. In the seminal case of Dirks v. SEC , the Supreme Court defined such personal benefit to include "when an insider makes a gift of confidential information to a trading relative or friend," 463 U.S. 646, 664, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), a standard easily met here. But in United States v. Newman , 773 F.3d 438 (2d Cir. 2014), the Second Circuit decreed that a personal benefit may be inferred from such a relationship only where it is a "meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Id. at 452. While the vitality of this pronouncement is somewhat in doubt, see Salman v. United States , ––– U.S ––––, (argued Oct. 5, 2016), the jury, having been instructed in accordance with Newman , could have readily found that even that high standard was met here.

To start with, a rational jury could have concluded that Martin and Conradt were in fact close friends. The two men considered each other friends and not only lived together as roommates but also engaged in a variety of social activities together, such as dining, hosting parties, playing basketball, and so forth. See Martin Tr. at 12–14, 161–62; Trial Tr. at 95–98, 112–14, 140–41. While at trial, Conradt attempted to downplay their relationship, his testimony was so thoroughly impeached that the jury could not only have disregarded as much of it as they then saw fit, but also could have drawn an adverse inference. See ...