4Cir Remands SEC's Case To District Court For Some Old Fashioned Jury Muddling

February 27, 2023

The Federal Rules of Civil Procedure allow a District Court judge to dismiss a case after finding that a party had failed to carry its burden of proof to the extent that no reasonable jury could possibly find in that party's favor. In a recent insider trading case, the trial judge found that the SEC came to court with lots of allegations but not so much proof; and, accordingly, he dismissed the case. On appeal, a Circuit Court thought that a jury could have muddled through the SEC's allegations. 

December 2020: SEC Complaint

In the United States District Court for the Eastern District of Virginia ("EDVA"), the SEC filed a Complaint on December 11, 2020, charging Defendant Christopher Clark (Corporate Controller of CEB Inc.) and Defendant William Wright (Clark's brother-in-law) with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder https://www.sec.gov/litigation/complaints/2020/comp24982.pdf As alleged in the "Summary" of the SEC Complaint:

1.This action involves insider trading by Defendant Christopher Clark in the securities of CEB Inc. (“CEB”) before CEB and Gartner, Inc. (“Gartner”) announced on January 5, 2017 that Gartner would acquire CEB for $2.6 billion. Gartner approached CEB about a merger in October 2016, and soon thereafter, Clark was tipped about the potential merger by his brother-in-law, Defendant William Wright, who served as CEB’s corporate controller at the time.

2. Specifically, in November 2016, Wright learned material, nonpublic information (“MNPI”) concerning Gartner’s potential acquisition of CEB. As CEB’s corporate controller, Wright had a duty to CEB not to disclose that information to Clark, who Wright knew had previously traded in CEB stock. CEB maintained insider trading policies that Wright reviewed and confirmed compliance with annually. 

3. Between early November 2016 and January 3, 2017, merger discussions between Gartner and CEB continued to progress. During that time, Wright and Clark, whose homes were less than two miles apart, communicated by phone, text, and in person, including while Clark coached their daughters' basketball team and at family holiday events.

4. In the first weeks of December 2016, merger discussions intensified, with Gartner making multiple offers, each increasing in value. Between December 2 and the morning of December 9, 2016, Wright and Clark communicated at least five times  twice at their daughters' basketball activities, twice by text, and once on a short call at 8:20 am on the morning of the 9th.

5. That same day, with CEB trading at $59.50, Clark purchased 60 CEB call options with a strike price of $65. Forty of the CEB call options were set to expire in January 2017. It was the first time in more than five years that Clark took a bullish position on CEB.

6. In 15 transactions between December 9, 2016 and January 3, 2017, Clark purchased 377 out-of-the-money, short-term CEB call options for a combined $33,050. Clark also directed his son to purchase similar options. On all but five occasions, Clark's purchases represented 100% of the option series volume for that day. On four of the five remaining occasions, the only other purchaser of those call options was Clark's son. 

7. Clark undertook extraordinary efforts to raise cash for these purchases. On December 9, 2016, Clark sold all 407 shares of a unit investment trust in his wife’s IRA account  the only holding in that account. Three days later, he borrowed $6,000 from a line of credit at his family credit union, nearly maxing out the $20,000 credit limit. On December 27, 2016, Clark took out a loan on his car. He used virtually all of this money to purchase short-term, out-of-the-money call options on CEB.

8. As Clark’s trading progressed, he and Wright communicated frequently. These communications often immediately preceded Clark’s trading. For example, the Clarks and Wrights spent Christmas Eve and Christmas together in 2016. On December 27, 2016, the first trading day thereafter, Clark took out the loan on his car and bought 30 CEB call options at a $70 strike price with an expiration date of February 2017, even though CEB’s share price closed the trading day at just over $60. 

9. Clark also told his son to purchase similar options. Communications between Clark and his son often preceded his son’s trading in CEB options. For example, on December 13, 2016, Clark and his son spoke for 13 minutes at 9:03 am. His son purchased five out-of-the money CEB call options at 11 am. At 2:22 pm, they spoke again. Eight minutes later, his son purchased more of the same type of option. Clark’s son had never held a bullish position in CEB until that day. 

10. Notably, as merger negotiations reached their final stage in late December 2016 and early January 2017, Clark and his son took increasingly short-term positions in out-of-the money CEB call options, consistent with the expectation that CEB’s stock price would increase significantly in the near future. Before late December, almost all of the call options that Clark and his son purchased expired in March. But by late December and early January, both Clark and his son began to purchase call options with February and even January expirations.

11. Before the market opened on January 5, 2017, CEB and Gartner announced that they had entered into a definitive merger agreement in which Gartner would acquire CEB for $77.25 per share. That day, CEB's stock price closed at $74.85 a share, an increase of 21% from the previous day's close.

12. Clark sold his CEB call options on January 5, 6 and February 3, 2017, reaping illicit profits of $243,190. Clark's son sold all of his call options on January 5, 2017, for profits of $53,050. 

at United States Securities and Exchange Commission, Plaintiff, v. Christopher Clark and William Wright, Defendants (Complaint, EDVA, 20-CV-01529 / December 11, 2020)

Wright Settles

On October 18, 2021, EDVA entered a Final Consent Judgment against Defendant Wright, who:

Without admitting or denying the allegations in the complaint, Wright consented to a final judgment ordering a permanent injunction against future violations of the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; ordering a civil monetary penalty of $240,934; and barring Wright from serving as an officer or director of a public company for two years.

In a related administrative proceeding based on the entry of the final consent judgment, on November 12, 2021, the SEC issued an order barring Wright from appearing or practicing before the SEC as an accountant pursuant to Commission Rule of Practice 102(e)(3)(i), with the right to reapply after two years.

at "SEC Obtains Judgment Against Former Corporate Controller for Tipping Brother-In-Law Ahead of Merger Announcement" (SEC Litigation Release / November 15, 2021) at https://www.sec.gov/litigation/litreleases/2021/lr25264.htm

EDVA Dismisses SEC v. Clark

The SEC proceeded with its surviving case against only Defendant Clark. Upon the completion of the SEC’s case in chief, Defendant Clark file a Motion for Judgment as a Matter of Law under Rule 50(a).

SIDE BAR: Federal Rule of Civil Procedure 50: Judgment as a Matter of Law in a Jury Trial; Related Motion for a New Trial; Conditional Ruling

(a) Judgment as a Matter of Law.

(1) In General. If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may:

(A) resolve the issue against the party; and

(B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.

(2) Motion. A motion for judgment as a matter of law may be made at any time before the case is submitted to the jury. The motion must specify the judgment sought and the law and facts that entitle the movant to the judgment.. . .

In his Rule 50(a) argument, Clark characterized the SEC's case as having presented only speculative evidence that Wright had insider information before the December 9th day on which the cited CEB trading occurred. In the absence of probative evidence demonstrating that Wright, in fact, had possessed inside information about CEB’s merger, Clark asserted that the SEC lacked the ability to prove that such information was passed from Wright to Clark -- and, in fact, had failed to demonstrate that such had occurred.  

EDVA agreed with Defendant Clark's argument and granted Defendant Clark's Motion to Dismiss.
United States Securities and Exchange Commission, Plaintiff, v. Christopher Clark, Defendant (Order of Dismissal, EDVA, 20-CV-01529 / December 13, 2021)

4Cir Reverses EDVA

The SEC appealed EDVA's Order to the United States Court of Appeals for the Fourth Circuit ("4Cir"). United States Securities and Exchange Commission, Plaintiff/Appellant, v. Christopher Clark, Defendant/ Appellee and William Wright, Defendant (Opinion, 4Cir, 22-1157 / February 23, 2023)
https://brokeandbroker.com/PDF/Clark4Cir230223.pdf. 4Cir's analysis started with the question:

Could a reasonable jury infer, based on the evidence the Commission presented during its case in chief, that Clark engaged in insider trading based on insider information from Wright?"

In answering that question, 4Cir ultimately found that EDVA had

failed to consider the evidence in the light most favorable to the Commission. In emails on November 3, Anschutz and Wright discussed the effect of a transaction like a merger on unvested CEB stock, which they both had. And Anschutz and Wright exchanged these emails just one day after CEB’s board responded to Gartner’s initial merger offer. 

at Page 12 of the 4Cir Opinion

Enshrined Jury by Trial

In reversing EDVA and remanding the case back to the lower court, 4Cir admonished that:

The right to a trial by jury is enshrined by the Seventh Amendment. And the Federal Rules of Civil Procedure require that juries, not judges, decide cases so long as there is evidence from which a reasonable decision can be made. Here, evidence existed from which a reasonable jury could infer that Clark engaged in prohibited insider trading beginning on December 9, 2016. We, therefore, reverse the district court’s order granting Clark’s motion for judgment as a matter of law and remand for proceedings consistent with this opinion.

at Page 15 of the 4Cir Opinion

In reaching that conclusion, 4Cir found that EDVA had prematurely usurped a jury's role: 

[A] jury could have reasonably concluded that Wright had inside information about the merger before Clark began buying call options on December 9 -- the very day that the Board approved the merger. In fact, Wright corroborated that inference in the January emails with recruiters. True, Clark insists the emails to recruiters were just “puffery” designed to make Wright a more attractive candidate. J.A. 2007–08. True, the November 3 emails were before CEB accepted Gartner’s offer and before the share price Gartner offered reached a level that was acceptable to CEB. And true, there was no direct evidence that Anschutz told Wright about the merger before December 9. But our job in reviewing an order granting a motion for judgment as a matter of law is not to decide whether Wright in fact possessed inside information before December 9; it is to decide whether there was evidence from which a reasonable jury could have concluded that he had such information. And there was.

There was also evidence from which a reasonable jury could have concluded that Wright passed inside information about the merger to Clark before December 9. First, the trades began on December 9, the very day CEB accepted Gartner’s offer. Second, until those transactions, Clark had only once before traded in CEB call options, nearly a decade earlier. Instead, he had always bought put options, which bet on the company’s value to go down. Third, he did not just bet on CEB’s share price to go up; Clark went to extraordinary measures to buy the call options. He emptied his wife’s retirement account, borrowed money at a 9% interest rate, and took out a loan secured by his car to fund the purchases. In total, he bought call options ten times in less than a month. Fourth, he advised his son to make similar purchases and later lied to the FBI about whether he had done so. And fifth, his trades proved remarkably lucrative. The $245,230 he made in profit from purchases of $33,050 represented a return on investment of over 700%. A jury considering all of this evidence could reasonably infer that Clark received inside information from Wright and used it to aggressively trade in a way that would be reckless if he did not have inside information. 

In reversing the district court’s order, we are not suggesting Clark is liable for insider trading. A jury could reasonably decide that Wright did not have any inside information about the merger by December 9. As the district court noted, Clark had speculated on CEB stock for many years. And he professed to have an investment strategy that explained his December 9 transactions. But to repeat, in considering a motion for a judgment as a matter of law, our task is only to decide whether there is evidence from which a reasonable jury could have decided that Clark was liable. 

at Pages 14  - 15 of the 4Cir Opinion

Bill Singer's Comment

I'm a New York Jets fan, which means I have suffered greatly in recent years. My wife could not care less about football. As yet another NFL playoff season unfolded, my wife asked me if I was going to watch any of the playoff games. Of course, I answered -- I'm a fan and still enjoy watching a good game even if my team isn't in the playoffs. Even if my team hasn't been to the playoffs in over a decade. Even if my team almost never gets past the Wild Card game. Even if my team did have that one magnificent Super Bowl victory in 1968, albeit that was in the last century. 

What does my pathetic loyalty to the beleaguered New York Jets have to do with SEC v. Wright? Sometimes when it comes to sports and lawsuits, you root for your home team; other times, you just sit back as a spectator and enjoy the game. When it comes to SEC v. Wright, I'm a spectator watching two teams pound the crap out of each other and loving every minute of it!

For starters, the whole Rule 50(a) issue is fascinating. As the Rule prescribes, during a jury trial, a court may find that a "reasonable jury would not have a legally sufficient evidentiary basis to find for the party. . . ;" and, based upon the EDVA's findings, it so found and dismissed the SEC's case. Then along comes 4Cir and pronounces about the Constitutionally enshrined right to a trial by jury and how we need to preserve the prerogative of a reasonable jury to infer from the SEC's evidence that Clark had engaged in prohibited insider trading beginning on December 9, 2016. 

All of which reminds me of a linebacker whacking a quarterback's throwing arm and dislodging the football, and then the linebacker picks up the ball and runs it in for a touchdown. Then the action on the field stops as we are advised that a video replay is under review to decide if the quarterback was hit when his arm was going forward.  While the review is underway, I watch the video replay on the television and it sure as hell looks like the linebacker hit the quarterback's arm before it was going forward. Which is how it looked to the television announcer. That's a fumble. That means the touchdown stands. None of which matters because the guy on the field in the striped shirt is now waving his arms and telling us that the video replay officials ruled that the quarterback's arm was going forward. We got an incomplete pass. No fumble. No touchdown. Play the next down.

You have on-the-field officials and you have the off-the-field officials, and that causes a lot of unhappiness when a video replay shows that the linebacker hit the quarterback at a point in the throwing motion that sort of looks like the arm had not gone forward but, gee, maybe it's just at that point where it did, but, I dunno, it's a real close call. When the actual play on the field is, at best or worst, "iffy," where should the power to make the call be placed: with the ref on the field or some ref off-the-field but watching a video? On the other hand, if the on-the-field ref made the wrong call, you wouldn't want the Super Bowl to be decided by a mistake, right? 

If I were rooting for one of the two parties in the SEC v. Clark, I might be more worked up over the appellate ruling reversing the trial court. In this case, I'm merely a spectator, not a partisan fan. As such, we have what's essentially half-time, and it's a tied game. It will be fun to see how things turn out in the second half.


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