A couple of weeks ago I expressed skepticism about the ultimate impact of Judge Rakoff’s recent opinion in SEC v. Payton. In it, he held that for purposes of a motion to dismiss, the SEC had adequately alleged insider trading violations in a remote tippee context, even after the Second Circuit’s decision in United States v. Newman. Briefly, the issue was this: for insider trading liability, the Second Circuit now requires (1) that the personal benefit coming back to a tipper be “of some consequence” and generally something beyond mere friendship; and (2) that each tippee or remote tippee know what that benefit is.
SEC v. Payton
As for the second requirement, I wondered out loud last November if traders wouldn’t adjust to this new world by making sure they didn’t know what the personal benefit was. I wouldn’t describe myself as a cynic, but I’ve seen people try to construct walls of plausible deniability before. They can be hard to knock down. At least for SEC cases, Judge Rakoff thinks they certainly can be knocked down. He noted in Payton that the intent required to sustain a violation of Section 10(b) in an SEC case is recklessness, which he described as “heedless disregard of the probable consequences.” That is a sufficient definition in some legal contexts, but I think it understates what the SEC has to show in the Second Circuit.
To prove violations of Section 10(b), the SEC must demonstrate that the defendant acted either with scienter, defined as “a mental state embracing intent to deceive, manipulate, or defraud.” SEC v. Obus, 693 F.3d 276, 286 (2d Cir. 2012). The Second Circuit has held that scienter “may be established through a showing of reckless disregard for the truth, that is, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care.” Id. Other circuits describe the same concept as “severe recklessness.” See, e.g., Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001). The courts’ point is, if a defendant is going that far down the intent spectrum, it really doesn’t matter. It’s enough for scienter.
Kevin Love's Shoulder
Kevin Love will tell you. I don’t know if you saw this play from the last game in the Cavaliers’ sweep of the Celtics in the NBA playoffs’ first round. In it, you see perennial All-Star Kevin Love and non-All-Star Kelly Olynyk thrashing Love’s shoulder like he’s trying to start a lawnmower. According to press reports, the move dislocated Love’s shoulder, required surgery, and has taken Love out of action for the next four-to-six months. Those months include the rest of the 2015 playoffs, which mean a lot to the Cavaliers if not the Celtics. After the game, Love accused Olynyk of intentionally hurting his shoulder. Olynyk naturally said of course he would never have intentionally done such a thing. And lots of knuckleheads on sports radio the next morning yelled about how Kelly Olynyk didn’t have a history of deliberately assaulting other people so how could he have done so here, etc.
As I listened to them I thought, does it matter? Let’s assume Olynyk didn’t walk onto the court with malice in his heart and his eyes zeroed in on Love’s shoulder. Having locked arms with Love, though, he did launch into a move that didn’t help get the basketball but easily could have liberated Love’s shoulder from the rest of Love’s body. If Game 4 had been a civil securities fraud case, I think the Second Circuit would say Olynyk is just as liable either way.
These levels of intent are important, in SEC cases and NBA playoff games.