SEC v. Payton, et al reads like an episode of a daytime soap opera. A law firm associate working on the 2009 acquisition of SPSS, Inc. by IBM tells a close personal friend (“friend”) about the confidential transaction; the friend tells his roommate; the roommate tells two coworkers at a brokerage firm (“remote tippees”); and the remote tippees trade on the nonpublic information. The SEC filed suit against the roommate and the remote tippees in the US District Court for the Southern District of New York alleging insider trading. The remote tippees – naturally – filed a motion to dismiss based on the theory that they were too far from the source of the information and not directly involved in a scheme to misappropriate non-public information where the participants received personal benefit. The Court denied the motion to dismiss.
In denying the motion, the Court arguably took some liberty in interpreting existing case law (U.S. v. Newman, 773 F.3d 438 (2d Cir, 2014). Its reasoning is, nonetheless persuasive. The remote tippees knew that they had received inside information, they pumped their coworker for more and obtained it, they knew (or had reckless disregard for the knowledge) of the close personal relationships of the individuals in the chain, and they deliberately tried to conceal their knowledge of the information and their trading based on it.
The reminders and lessons from Payton for accountants is pretty clear. Accountants frequently have access to confidential information about their clients that would meet the definition of “inside information.” (You don’t need to be an employee of a company to be an insider.) Distance from the source of the nonpublic information does not automatically excuse insider trading. It depends on the surrounding facts and circumstances. Loose lips sink ships. Refrain from disclosing inside information, even to the closest of friends or relatives. It is difficult to control both further dissemination and use.