On December 13, 2021, U.S. District Court Judge Claude Hilton, of the Eastern District of Virginia, dismissed the Securities and Exchange Commission’s (“SEC’s”) insider trading action against Christopher Clark before the defense put on its case-in-chief. The Court agreed with defendant’s arguments that the SEC’s evidence was insufficient as a matter of law, even though the SEC was able to present evidence of what it claimed to be (1) suspicious trading patterns, (2) a close relationship with a corporate insider; and (3) communications patterns corresponding to the trading. Absent actual evidence of a tip, or testimony supporting the SEC’s theory, the Court agreed with defendant that the SEC’s case was simply too speculative. As the SEC increasingly seeks to use data analytics and circumstantial evidence to prove insider trading cases, the decision is a reminder that Courts may at times decide that more is needed.
The SEC filed its complaint on December 11, 2020 against Clark and his brother-in-law William Wright. The SEC alleged that Clark illegally traded on insider information concerning the stock of CEB, Inc., an IT consulting firm headquartered in Arlington, Virginia, which he allegedly received from Wright, who was the former corporate controller of CEB. Specifically, the SEC alleged that Wright had tipped off Clark in November 2016 to CEB’s pending $2.6 billion sale to a global technology research and advisory company. However, the SEC did not have any direct evidence of that purported tip – instead, the SEC had only circumstantial evidence: The fact of the relationship, and evidence of communications between the two individuals, plus what the SEC claimed was suspicious trading. From December 2016 to January 2017, Clark had entered into what the SEC alleged were highly speculative out-of-the-money call options on CEB stock, and had also allegedly directed his son to purchase the same options (although the SEC did not bring any action against Clark’s son). Clark purportedly secured approximately $300,000 in profits from his allegedly unlawful activities.
Wright and the SEC reached a settlement agreement in October 2021, in which he paid approximately $240,000 in penalties and was enjoined from serving as an officer or director of an issuer for two years. But Clark decided to proceed through summary judgment and, eventually, trial. The Court denied Clark’s summary judgment motion, finding that there were sufficient factual questions for the jury to decide. But after actually hearing the evidence at trial from the SEC, the Court agreed with Clark that the SEC’s case was simply too speculative.
Although any district court’s dismissal has limited precedential value (and this one still could be appealed by the SEC), it is an important reminder that some fact finders and courts will resist the invitation to infer and that courts are prepared to require rigorous proof even in cases brought by government enforcers.