Court Opinion

ID: 4244536
Source: CourtListenerOpinion
Date Created: 2018-02-13 15:00:18.973255+00
Date Added: 2024-06-11T14:43:22.677595
License: Public Domain

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.

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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.

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         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).

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         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))).

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        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

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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

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