SEC v. Payton ( 2018 )


Menu:
  • 17-290-cv
    SEC v. Payton
    UNITED STATES COURT OF APPEALS
    FOR THE SECOND CIRCUIT
    SUMMARY ORDER
    Rulings by summary order do not have precedential effect. Citation to a summary order filed
    on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
    Procedure 32.1 and this Court’s Local Rule 32.1.1. When citing a summary order in a
    document filed with this Court, a party must cite either the Federal Appendix or an
    electronic database (with the notation “summary order”). A party citing a summary order
    must serve a copy of it on any party not represented by counsel.
    At a stated term of the United States Court of Appeals for the Second Circuit, held at
    the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
    on the 13th day of February, two thousand eighteen.
    PRESENT:        PIERRE N. LEVAL,
    GUIDO CALABRESI,
    JOSÉ A. CABRANES,
    Circuit Judges.
    UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
    Plaintiff-Appellee,                       17-290-cv
    v.
    DARYL M. PAYTON, BENJAMIN DURANT, III,
    Defendants-Appellants.
    FOR PLAINTIFF-APPELLEE:                              DAVID D. LISITZA, Senior Litigation
    Counsel (Michael A. Conley, Solicitor,
    Jacob R. Loshin, Senior Counsel, Kerry J.
    Dingle, Counsel, on the brief), for Robert B.
    Stebbins, General Counsel, United States
    Securities and Exchange Commission,
    Washington, DC.
    FOR DEFENDANT-APPELLANT
    BENJAMIN DURANT, III:                                GREGORY MORVILLO, E. Scott Morvillo,
    Morvillo LLP, New York, NY.
    1
    FOR DEFENDANT-APPELLANT
    DARYL M. PAYTON:                                           MATTHEW E. FISHBEIN (Sean Hecker,
    Rushmi Bhaskaran, Laura E. O’Neill,
    Debevoise & Plimpton LLP, New York,
    NY, Noam B. Greenspan, Petrillo Klein
    & Boxer LLP, New York, NY, on the brief),
    Debevoise & Plimpton LLP, New York,
    NY.
    Appeal from a judgment and post-judgment order of the United States District Court for the
    Southern District of New York (Jed S. Rakoff, Judge).
    UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
    ADJUDGED, AND DECREED that the May 16, 2016 judgment and November 29, 2016 post-
    judgment order of the District Court be and hereby are AFFIRMED.
    Defendants-appellants Daryl M. Payton and Benjamin Durant, III (jointly, “Defendants”)
    appeal from a May 16, 2016 judgment of the District Court holding them civilly liable for insider
    trading under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R.
    § 240.10b-5, and a November 29, 2016 post-judgment order denying their motion for a judgment as
    a matter of law or for a new trial. On appeal, Defendants argue that the judgment of liability should
    be vacated, in part because, based on the evidence presented at the seven-day trial, no reasonable
    jury could have concluded that plaintiff-appellee United States Securities and Exchange Commission
    (“SEC”) proved the existence of a duty of trust and confidence, a breach of that duty in exchange
    for personal benefit, or that Defendants had the requisite scienter. Defendants also appeal a jury
    instruction and two evidentiary rulings. Upon review, we conclude that Defendants’ arguments are
    without merit. We assume the parties’ familiarity with the underlying facts, the procedural history of
    the case, and the issues on appeal.
    BACKGROUND
    In 2009, Michael Dallas, an associate at Cravath, Swaine & Moore LLP (“Cravath”), was
    working on IBM’s highly confidential, proposed, all-cash acquisition of SPSS, Inc. (“SPSS”), a
    publicly traded software company. Dallas told a friend, Trent Martin, about it. Martin passed the
    information to his roommate, Thomas Conradt. Conradt, a broker at Euro Pacific Capital,
    proceeded to share the information with several individuals at his firm, including Defendant Payton.
    The information also made its way to Defendant Durant. Defendants Payton and Durant then
    purchased short-term options in SPSS based on the information, as Payton admitted at trial. Joint
    App’x at 524–25. Following the buyout, Defendants Payton and Durant pocketed $243,860 and
    $606,351, respectively, by exercising their options.
    2
    The SEC later brought civil claims against Defendants for insider trading. As relevant here,
    the SEC proceeded under the theory that Martin received the information from Dallas, the Cravath
    associate, in confidence, and was the first to pass the information to another with the expectation
    that it would be misused. According to the SEC, Martin shared the information with Conradt as a
    tip, and benefited either from making a valuable gift to a close friend or by an exchange for several
    favors. According to the SEC’s theory, Defendants were derivatively liable for trading on the tips
    because they were aware that the information very likely had been obtained through a breach of duty
    for personal benefit, but nevertheless consciously or recklessly avoided learning about the
    information’s source.
    The jury found Defendants liable for insider trading. Following entry of the final judgment,
    Defendants moved for a judgment as a matter of law under Federal Rule of Civil Procedure 50(b)
    or, alternatively, a new trial under Federal Rule of Civil Procedure 59. Defendants argued that
    judgment as a matter of law was appropriate because the SEC had not presented sufficient evidence
    for a reasonable jury to find, inter alia, that: (1) Martin had breached a duty of trust and confidence to
    Dallas; (2) Martin had provided the tip to Conradt in exchange for a personal benefit; and (3)
    Defendants knew or should have known that the source of the tip was a breach of trust and
    confidence for personal benefit.
    On November 29, 2016, the District Court, inter alia, denied the Rule 50(b) and 59 motions.
    This appeal followed.
    STANDARD OF REVIEW
    We review de novo a district court’s denial of a Rule 50 motion for judgment as a matter of
    law. Kinneary v. City of New York, 
    601 F.3d 151
    , 155 (2d Cir. 2010). We may only grant the motion if
    “the evidence, viewed in the light most favorable to the opposing party, is insufficient to permit a
    reasonable juror to find in [the opposing party’s] favor.” Galdieri-Ambrosini v. Nat’l Realty & Dev.
    Corp., 
    136 F.3d 276
    , 289 (2d Cir. 1998). In so doing, we “‘must give deference to all credibility
    determinations and reasonable inferences of the jury,’ and may not weigh the credibility of witnesses
    or otherwise consider the weight of the evidence.” Caruolo v. John Crane, Inc., 
    226 F.3d 46
    , 51 (2d Cir.
    2000) (quoting 
    Galdieri-Ambrosini, 136 F.3d at 289
    ).
    We review a district court’s denial of a Rule 59 motion for a new trial for abuse of discretion.
    Bucalo v. Shelter Island Union Free Sch. Dist., 
    691 F.3d 119
    , 128 (2d Cir. 2012). “A district court has
    abused its discretion if it has (1) based its ruling on an erroneous view of the law, (2) made a clearly
    erroneous assessment of the evidence, or (3) rendered a decision that cannot be located within the
    range of permissible decisions.” Chin v. Port Auth. of NY & NJ, 
    685 F.3d 135
    , 146 (2d Cir. 2012)
    (internal quotation marks omitted).
    3
    We review a claim of error in jury instructions de novo, and will “revers[e] only where, viewing
    the charge as a whole, there was a prejudicial error.” Terra Firma Investments (GP) 2 Ltd. v. Citigroup
    Inc., 
    716 F.3d 296
    , 299 (2d Cir. 2013).
    Finally, we review a district court’s evidentiary rulings for abuse of discretion, and “will
    reverse only if an erroneous ruling affected a party’s substantial rights.” Marcic v. Reinauer Transp. Cos.,
    
    397 F.3d 120
    , 124 (2d Cir. 2005).
    DISCUSSION
    I.       Defendants’ Motion for a Judgment as a Matter of Law
    On appeal, in support of their entitlement to JMOL, Defendants proffer numerous
    testimonial excerpts and interpretations of exhibits that, if credited, would undercut the SEC’s theory
    of the case. For example:
       Martin testified that he thought Dallas wanted him to trade on the information, Joint
    App’x at 2819, and sent a text to Dallas about “hit[ting] that stock,” 
    id. at 503–06,
                     which suggests, according to Defendants’ argument, that Martin did not owe Dallas
    any legally cognizable duty to keep the information confidential. Cf. Salman v. United
    States, 
    137 S. Ct. 420
    , 423 (2016) (“Section 10(b) of the Securities Exchange Act of
    1934 and the Securities and Exchange Commission’s Rule 10b-5 prohibit
    undisclosed trading on inside corporate information by individuals who are under a
    duty of trust and confidence that prohibits them from secretly using such
    information for their personal advantage.”).
       Conradt and Martin were casual acquaintances who met through Craigslist, Conradt
    had deceived Martin about rent payments, Joint App’x at 2809–10, and both testified
    that the benefits Martin received from Conradt were unrelated to the tip, 
    id. at 409–
                     11, 417–18, 2808–09, all of which suggests that Martin did not receive a personal
    benefit from Conradt in exchange for the tip. Cf. 
    Salman, 137 S. Ct. at 427
    (“[T]he
    disclosure of confidential information without personal benefit is not enough.”).
       Payton testified that rumors about buyouts are routine, Joint App’x at 606, and
    Conradt’s fellow brokers considered him “green,” which suggests that the SEC could
    not establish that Defendants consciously avoided learning about the source of the
    tip. Cf. SEC v. Obus, 
    693 F.3d 276
    , 287 (2d Cir. 2012) (“[A] tippee has a duty to
    abstain or disclose ‘only when the insider has breached his fiduciary duty . . . and the
    tippee knows or should know that there has been a breach.’” (quoting Dirks v. SEC, 
    463 U.S. 646
    , 660 (1983) (alteration and emphasis in original))).
    4
    But, of course, the jury was not required to find this testimony credible or accept
    Defendants’ glosses. It was, instead, free to weigh all the evidence presented during the trial and
    “believe part and disbelieve part of any witness’s testimony.” Zellner v. Summerlin, 
    494 F.3d 344
    , 371
    (2d Cir. 2007). Here, that means that the jury was free to credit the testimony and evidence that
    supported the SEC’s theory and draw reasonable inferences that favored the SEC’s theory.
    For instance, the jury could have credited Dallas’s testimony that he did not expect Martin to
    trade on or share with others the confidential information, Joint App’x at 2878, 2887, and inferred,
    in part from Dallas’s anger at learning Martin had traded on the information, 
    id. at 2891,
    that Martin
    had a duty to Dallas to keep the information secret. And it could have inferred a quid pro quo from
    emails that Conradt sent to help Martin secure counsel following an arrest that threatened his visa.
    
    Id. at 1269–72.
    And it could have inferred conscious avoidance from the fact that Payton and others
    who purchased SPSS stock met in a hotel room the evening of the buyout announcement to
    conspire about concealing their trades, and later lied about the source of their information. 
    Id. at 403–07,
    649–55, 860–62.
    “Where there are conflicts in the testimony, we must defer to the jury’s resolution of the
    weight of the evidence and the credibility of the witnesses.” United States v. Persico, 
    645 F.3d 85
    , 104
    (2d Cir. 2011). Accordingly, we affirm the District Court’s denial of Defendants’ motion for a
    judgment as a matter of law under Rule 50.
    II.     The Jury Instruction and Evidentiary Rulings
    Defendants next argue that the District Court gave an erroneous and prejudicial jury
    instruction, and made two prejudicial evidentiary rulings. Defendants appear to suggest that these
    purported errors warrant vacatur of the jury verdict and the entry of an order granting the motion for
    a new trial under Rule 59. We are not persuaded.
    The District Court instructed the jury that the SEC had to prove five elements, including
    (1) “that Trent Martin owed a duty of trust and confidence to the original source of the material
    nonpublic information, namely, Michael Dallas,” and (2) “that Trent Martin breached that duty by
    disclosing that information to Thomas Conradt.” Joint App’x at 1154. Contrary to what Defendants
    contend, this jury instruction did not tell the jury it could find that Martin owed Dallas a duty of
    trust and confidence not to pass on the information even if Dallas intended Martin to trade on the
    information. The instruction expressed no view on that question. Rather, the instruction accurately
    articulated the elements of the claim. And “[w]here a district court’s jury instructions accurately track
    the language and meaning of the relevant statute, we generally will not find error.” United States v.
    Alfisi, 
    308 F.3d 144
    , 150 (2d Cir. 2002).
    Defendants’ contentions that the District Court abused its discretion in evidentiary rulings
    do not affect our disposition. As for the exclusion of Payton’s supposed expression of surprise that
    5
    Conradt’s tip had been accurate, we conclude that the District Court did not abuse its discretion
    when it reasoned that the hearsay exception for expressions of a declarant’s “then-existing state of
    mind,” Fed. R. Evid. 803(3), was not available because Defendants failed to lay a foundation
    showing that the witness Conradt was in a position to observe whether Payton’s statement
    expressed actual or feigned surprise. Joint App’x at 447. In any event, whether Payton was, or was
    not, surprised to learn that Conradt had been the source of a valuable tip had little bearing on the
    issues for resolution by the jury.
    As for the receipt into evidence of Weishaus’s post-arrest statements, his plea allocution, and
    his text message exchanges with Conradt, these were either admissible under Federal Rule of
    Evidence 804(b)(3), as statements Weishaus “would have made only if [he] believed [them] to be
    true because . . . [of their] tendency . . . to expose [Weishaus] to civil or criminal liability,” see Fed. R.
    Evid. 804(b)(3)(A), or, to the extent this was less clear as to portions of the statements directed to
    Defendants’ conduct, because they were insufficiently prejudicial when considered in the context of
    the overall evidence to affect our disposition. As for Weishaus’s report of a meeting among persons
    who had traded on the information at which Defendant Durant urged adoption of a common
    innocent explanation, Durant acknowledged in his own testimony that this took place, disputing
    only his motive for doing so.
    We thus reject Defendants’ challenges to the jury instruction and evidentiary rulings, and
    conclude that the District Court did not abuse its discretion in denying Defendants’ Rule 59 motion.
    CONCLUSION
    Having reviewed all of the arguments raised by Defendants Payton and Durant on appeal,
    we AFFIRM the May 16, 2016 judgment and November 29, 2016 post-judgment order of the
    District Court.
    FOR THE COURT:
    Catherine O’Hagan Wolfe, Clerk
    6