U.S. District Judge Jed Rakoff issued a decision in SEC v. Payton (S.D.N.Y. Apr. 6, 2015) denying the defendants’ motion to dismiss a civil insider-trading suit filed by the SEC.  The court held that the SEC’s complaint had adequately alleged that the tipper of material nonpublic information had received a personal benefit for the disclosure and that the remote tippees had had sufficient knowledge of that benefit under the “recklessness” standard applicable to civil cases.  In so ruling, however, Judge Rakoff observed that the Second Circuit’s restrictive reading of the personal-benefit requirement in United States v. Newman “may not be obvious” in light of the Supreme Court’s controlling decision in Dirks v. SEC.

The Payton case involved allegedly material nonpublic information about a potential corporate acquisition.  The information came from one of the bidder’s outside attorneys, who allegedly told a friend named Martin (the initial tipper) in circumstances where the two allegedly shared a duty of trust and confidence.  Martin allegedly tipped his roommate, Conradt, who “shared a close, mutually-dependent financial relationship, and had a history of personal favors” with Martin.  Conradt allegedly told another registered representative, who allegedly tipped the two defendants.  Conradt also allegedly spoke to the two defendants about the information.  The SEC brought these civil proceedings against the two defendants for their trading.