Securities Regulation Daily No error in civil penalty imposed after breach of SEC cooperation agreement
Thursday, August 24, 2017

No error in civil penalty imposed after breach of SEC cooperation agreement

By Rodney F. Tonkovic, J.D.

In a summary order, the Second Circuit has affirmed the district court's denial of a motion to vacate a consent order. Thomas Conradt had entered into a consent judgment with the SEC, agreeing to disgorge profits obtained through insider trading. The district court later found that Conradt had breached his obligations to cooperate with the Commission and ordered him to pay nearly $1 million. The panel found that the district court did not err in holding that Conradt breached his settlement or in imposing the civil penalty (SEC v. Conradt, August 23, 2017, per curiam).

In 2009, Conradt, who was then working as a broker, learned through his roommate that IBM planned to acquire SPSS, Inc. Conradt, in turn, tipped several colleagues, who proceeded to trade in SPSS securities ahead of IBM's acquisition. Conradt eventually entered into a consent judgment with the SEC in which he agreed to disgorge his own trading profits of $2,533.60 and cooperate fully with the Commission. Conradt then testified at the trial of his tippees (Daryl M. Payton and Benjamin Durant), but the district court later found material discrepancies between his deposition testimony and at trial, indicating a likelihood that he lied at the trial. As a result, the court imposed a civil penalty of $980,229, the amount gained by Conradt and his tippees.

Vacatur. The panel first addressed the district court's decision to deny vacatur and found that the "exceptional circumstances" required to grant relief under Rule 60(b) were not present. Prior to settling with the SEC, Conradt had pleaded guilty to insider trading in a parallel criminal proceeding, but the judge in that case vacated his plea in January 2015 in light of the Second Circuit's decision in U.S. v. Newman. The district court concluded that the settlement agreements were not based, in any legal sense, on the guilty pleas and that Newman did not materially change the law. The panel agreed with this reasoning, stating that under Second Circuit precedent, and the express terms of Conradt's agreement, the consent agreement was not based on any collateral estoppel effect of the guilty plea in the criminal matter.

Terms of the agreement. Conradt then maintained that he did not materially breach his cooperation agreement, asserting that any discrepancies were the result of the Commission's failure to prepare him as a witness. The panel agreed with the district court'sconclusion that Conradt's testimony materially varied from his deposition, noting that at several points he stated that he could not recall events clearly recounted at his deposition. Because there was no justification for these changes in his testimony, the panel agreed that Conradt was not entitled to the benefits of the cooperation agreement.

Penalty upheld. Finally, the panel found that the district court did not err in imposing a civil penalty of $980,229. Since Conradt breached his agreement to cooperate, the Commission asked for treble damages, but the court determined that Conradt's "precarious" financial circumstances counselled in favor of a penalty in an amount equal to the sum of the profits made by Conradt and the tippees. The panel concluded that this amount was within the range of permissible outcomes and that the district court did not err.

The case is No. 15-2887-cv.

Attorneys: David Lisitza for the SEC. Justin Daniel Santagata, Mr. (Kaufman, Semeraro & Leibman, LLP) for Thomas C. Conradt.

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