S.E.C. v. Holley: District Court of New Jersey Clarifies “Personal Benefit” Requirement for Tipper Liability

The District Court of New Jersey recently weighed in on what the government needs to establish to prove that a defendant is liable for insider trading as a “tipper” in violation of SEC Rule 10b-5.  In S.E.C. v. Holley, Civil Action No. 11-0205 (DEA) (D.N.J. Sept. 21, 2015) -- one of the few cases in this District addressing the elements of tipper/tippee liability -- the District Court confirmed that although a defendant’s receipt of a tangible benefit from the purported tippee will satisfy the personal benefit test, the “mere fact of a friendship” is not enough to establish liability.  

In Holley, the SEC filed suit against the former Chairman of a publicly traded company, Board of Home Diagnostics, Inc. (“HDI”).  The SEC alleged that, between December 2009 and January 2012, the defendant intentionally provided material, nonpublic information to six individuals regarding HDI’s impending acquisition.  These individuals purchased shares in HDI and, after HDI was later acquired, together profited approximately $250,000.  

Based on this conduct, the government brought both criminal charges and a civil action against defendant.  The defendant pled guilty to two counts of securities fraud in the criminal action.  Later, the defendant agreed to a consent judgment in the civil action based on the underlying facts of the defendant’s guilty plea in the criminal action.

The defendant subsequently moved to vacate the consent judgment, arguing that a new case decided two days after the consent judgment was entered -- United States v. Newman, 773 F.3d 438 (2d Cir. 2014) – rendered the defendant’s admitted conduct not actionable under the securities laws.  Specifically, the defendant argued that, per Newman, because the defendant did not intend to receive "at least a gain of pecuniary or similarly valuable nature" when he provided confidential information, he was no longer liable for the conduct to which he pled guilty.

The District Court disagreed, explaining that, consistent with Newman, the defendant’s admitted intent to benefit the recipients of his tips is enough to satisfy the “personal benefit” requirement for tipper liability.  The Court also emphasized, however, that the “mere fact of a friendship, particularly of a casual or social in nature", would not be proof of the receipt of a personal benefit.  Instead, it was only due to the additional evidence of defendant’s intent to benefit the “tippees” that defendant’s conduct established his liability.

As such, although the Holley court refused to vacate the judgment against defendant, the case reaffirms that, in this District, the government will need to show more than a friendship between a purported tipper and tippee to prove a tipper’s liability for insider trading.