NEW YORK (Reuters) - U.S. securities regulators are set to take two former stockbrokers to trial in a case that tests the ability of authorities to pursue insider trading charges after an appellate court’s ruling reshaped the law.
Jury selection is scheduled for Tuesday in Manhattan federal court in the U.S. Securities and Exchange Commission’s case against ex-Euro Pacific Capital Inc traders Daryl Payton and Benjamin Durant.
The trial comes after an appellate ruling limited the scope of insider trading laws, forcing prosecutors to drop criminal charges against Payton and Durant over trades placed before IBM Corp announced a deal.
But the SEC continued to press civil charges, arguing it had enough evidence to establish liability even after the ruling.
The trial comes amid litigation over what constitutes insider trading, an issue the U.S. Supreme Court last month said it would review in a California case.
The question has dogged authorities in New York, where an appellate court in December 2014 said traders could only be held liable if they knew a tip’s source received a benefit in exchange.
The ruling, which reversed two hedge fund managers’ convictions, also narrowly defined a benefit as something of “some consequence” and not just friendship.
The decision enabled 14 of 96 people criminally charged for insider trading since 2009 under Manhattan U.S. Attorney Preet Bharara’s watch to avoid charges.
Among them were five men including Payton and Durant, all of whom previously had pleaded guilty, except Durant. The ruling prompted a judge to throw the guilty pleas out, and prosecutors dropped the charges.
The SEC, which with its civil case faced a lower burden of proof, elected to move forward, though, and convinced U.S. District Judge Jed Rakoff to not toss the case.
According to the SEC, in 2009, an attorney at IBM’s law firm told his friend Trent Martin that he was working on IBM’s $1.2 billion acquisition of SPSS Inc.
While the lawyer expected Martin, a Royal Bank of Scotland Group Plc analyst, to not tell anyone, Martin bought SPSS stock and told his roommate, Thomas Conradt, an Euro Pacific employee, the SEC said.
Conradt then told two colleagues including David Weishaus, and after one of the two told Durant, Conradt told Payton, the SEC said. Payton and Durant made over $290,000 off the tip, the SEC said.
Payton and Durant deny wrongdoing. They argue Martin received nothing that would constitute an illegal benefit for his information, nor did they know about any benefit if it existed.
The case is Securities and Exchange Commission v. Payton et al, U.S. District Court, Southern District of New York, No. 14-04644.
Reporting by Nate Raymond in New York; Editing by Noeleen Walder and Andrew Hay