Newman and Salman Come Into Play With Conradt Appeal

August 23, 2017

In 2014, the United States Court of Appeals for the Second Circuit ("2Cir") vacated the insider-trading convictions of two individuals on the ground that the Government had failed to present sufficient evidence that they knew the information they received had been disclosed in breach of a fiduciary duty. United States of America, Appellee, v. Todd Newman and Anthony Chiasson, Defendants-Appellants  - AND -Jon Horvath, Danny Kuo, Hyung G. Lim, Michael Steinberg, Defendants (Opinion, 2Cir, 13-CR-1837 and 12-CR-1917, December 10, 2014). As 2Cir held in Newman:

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the  Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal  benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.

Page 4 of the 2Cir Newman Opinion

Last year, the United States Supreme Court issued a dramatic insider trading ruling in United States of America v. Bassam Yacoub Salman (Opinion, Supreme Court, 15-628 / December 6, 2016).  Unfortunately, 2Cir's Newman and the Supreme Court's Salman Opinions didn't fully match up and legal pundits warned that there were some unresolved issues that would likely unsettle insider trading law both in terms of redressing prior determinations and in impacting ongoing or contemplated cases. 

The ripples from both Newman and Salman continue to spread.

As set forth in United States Securities and Exchange Commission, Plaintiff/Appellee, v. Thomas C. Conradt, Defendant/Appellant and David J. Weishous and Trent Martin, Defendants (Summary Order, 2Cir, 15-CV-2887; 15-CV-2967; 16-CV-2694 / August 23, 2017) [Ed: Footnotes omitted]:

Defendant-Appellant Thomas C. Conradt appeals the July 23, 2015 amended order and June 16, 2016 judgment of the district court, denying his motion to vacate his consent judgment under Federal Rule of Civil Procedure 60(b) and ordering a civil penalty of $980,229. On appeal, Conradt argues that the district court: (1) erred in denying his Rule 60(b) motion to vacate his consent judgment in light of the district court's decision to vacate his guilty plea in a parallel criminal proceeding; (2) erred in holding that Conradt breached his settlement by not cooperating fully and truthfully and thus did not merit a reduction in his penalty for cooperation; and (3) erred in imposing a civil penalty of $980,229. For the reasons set forth in the district court's orders and opinion, we find these claims to be without merit. We assume the parties' familiarity with the underlying facts, procedural history of the case, and issues on appeal.

Page 2 of the 2Cir Conradt Summary Order

By way of background, the SEC alleged, and Conradt and Martin do not dispute, that in 2009, Conradt, who was then working as a broker at EuroPaciric capital, learned of IBM's upcoming acquisition of SPSS from his roommate Trent Martin, who in turn had learned this information from Martin's friend Michael Dallas, an attorney who was working on the deal. See Second Amended Complaint, ¶ ¶1-2. Conradt then tipped Weishaus, a colleague of his at EuroPacific Capital. See Second Amended Complaint, ¶ 2. Conradt also tipped three additional colleagues, two of whom - Daryl M. Payton and Benjamin Durant, III were named in a related insider trading case brought by the SEC on June 25, 2014. See Second Amended Complaint, ~ 2; Payton and Durant Amended Complaint, 14-cv-4644, Dkt. 32, ¶ ¶ 1-2. Martin, Conradt, Weishaus, Payton, and Durant all traded in SPSS securities ahead of IBM's acquisition of SPSS. See Second Amended Complaint ¶ ¶ 2, 54, 73, 77; Payton and Durant Amended Complaint, ¶2.

The three defendants in the instant case - Conradt, Martin, and Weishaus - eventually reached Court-approved settlements with the SEC. Two of these defendants, Conradt and Martin, agreed to cooperate with the SEC, and the Court, on consent, entered judgment against them on December 23, 2013 . . .

Pages 2 - 3 of the SDNY Memorandum Order and Final Judgment

Stripped down to basics, Conradt had entered into a Consent Judgment and, thereafter, either out of remorse or a belief that his agreement was procured based upon now-reversed law, Conradt sought to have the judgment vacated. In fairness to Conradt, he had pled guilty in a parallel criminal case and that plea had been vacated based upon Newman considerations. Exacerbating Conradt's appeal were findings that he had breached his cooperation agreeement by not fully cooperating with the government and not being truthful in aspects of his alleged cooperation:

The Court, like the SEC, determines that Conradt "failed to cooperate fully and truthfully," thereby materially breaching his cooperation agreement. See Conradt Judgment at 3; Consent of Defendant Thomas C. Conradt, Dkt. 53, at 2. The SEC was therefore entitled to request more than $2,533.60 as a civil penalty against Conradt, and the Court - which has an independent obligation to assess an appropriate civil penalty - declines to grant Conradt the substantial benefits of truthful cooperation.

Page 7 of the SDNY Memorandum Order and Final Judgment

In short, Conradt is not entitled to intentionally change his testimony in a highly material way and without justification, and then to reap the benefits of an agreement to cooperate fully and truthfully. Accordingly, the Court finds that Conradt's penalty should not be limited to one that would be properly imposed on a truthful cooperator.

Page 10 of the SDNY Memorandum Order and Final Judgment

As you can see, the background sets up as on the one hand but on the other hand. Among the fascinating elements of Conradt's appeal is that it raises provocative questions as evidenced by this:

Conradt argues that the civil consent judgment at issue here was "based on" his now-vacated guilty plea in the parallel criminal proceeding. Def. Br. 3-4. He asserts that applying the consent judgment is no longer equitable under Rule 60(b) because the law on which it were based has changed due to United States v. Newman, 773 F.3d 438 (2d Cir. 2014), abrogated by Salman v. United States, 137 S.Ct. 420 (2016) (concerning insider trading). Under our precedents and the express terms of his agreement, Conradt's consent judgment was solely "based on" his consent-not on any collateral estoppel effect of his guilty plea in the parallel criminal matter. See United States v. Bank of New York, 14 F.3d at 760. As the district court explained, Conradt, "with the advice and assistance of counsel, entered into [this] agreement[ ] voluntarily, in order to secure the benefits thereof, including finality. While [Conradt's] decisions in the criminal proceeding may have influenced [his] strategy in the civil proceeding, the two proceedings were entirely separate actions." Joint App'x ("JA") 7 (internal citation omitted). Accordingly, we hold that the district court was within its discretion to deny vacatur absent the "exceptional circumstances" required to grant relief under Rule 60(b). United States v. Int'l Bhd. of Teamsters, 247 F.3d 370, 391 (2d Cir. 2001).

Page 3 of the 2Cir Conradt Summary Order