SEC ALJ Initial Decision Dismisses Insider Trading Case

This is an insider trading case. The four principal actors in this matter are John Heyman, Andrew Heyman, Todd Murphy, and Respondent Charles L. Hill, Jr. During the relevant time period, May to July 2011, John Heyman was the CEO of Atlanta-based Radiant Systems, Inc. Tr. 369. Andrew Heyman, who is John Heyman's younger brother, was Radiant's chief operating officer. Tr. 369-70. Murphy, who has no connection to Radiant, is an artist and close personal friend of Andrew Heyman. Tr. 861-64. Murphy is also a close friend of Hill, who is a commercial real estate developer. Tr. 87, 96-97, 861. Hill similarly has no connection to Radiant.

From May to July 2011, John Heyman, Andrew Heyman, and other senior officers at Radiant were involved in active negotiations with NCR Corporation regarding the latter's acquisition of Radiant. Tr. 379-82. These negotiations culminated on July 11, 2011, when the companies announced that Radiant's board had accepted NCR's cash tender offer. Div. Ex. 54 at 16. During this same time, Hill purchased, for himself and his daughters, more than $2 million of Radiant's stock. See infra § 1.2.3. When he sold all his and his daughters' shares on July 12, he gained over $740,000 in profits. Id.

Suspicious of Hill's trades, the Division of Enforcement investigated and concluded that Hill traded while in possession of material, nonpublic information about Radiant's potential 2 acquisition by NCR. See Order Instituting Proceedings (OIP) ¶¶ 2-5. It theorized that Hill received this information via Murphy, who received it from Andrew Heyman. Id. ¶ 2. The Division thus charged Hill with violating statutory and regulatory prohibitions on trading while in possession of material, nonpublic information about a tender offer. Id. ¶ 46. As is discussed below, while Hill may have possessed certain information about Radiant, there is no evidence that he received any information from Murphy or that Murphy ever had any knowledge of the negotiations between NCR and Radiant. Nor is there any evidence that Andrew Heyman passed any information about those negotiations to Murphy. The charges against Hill must therefore be dismissed.

2.2 The Division failed to carry its burden of proof 

The outcome of this case turns on whether the Division carried its burden to show that Hill knew or had reason to know that he traded while in possession of nonpublic information that he acquired from Andrew via Murphy. The Division argues that in light of Hill's unusual trading pattern, his relationship with Murphy, Murphy's relationship with Andrew, Murphy's pattern of communications with Hill and Andrew, and allegedly non-credible denials by Andrew and Murphy, I should infer both that Hill learned inside information and that he learned it from Andrew via Murphy, knowing or having reason to know it came from Andrew. Drawing reasonable inferences is part of an adjudicator's bread and butter. An adjudicator errs, however, when he or she relies solely on speculation, i.e., when he or she reaches a conclusion in the "complete absence of probative facts to support the conclusion." Lavender v. Kurn, 327 U.S. 645, 653 (1946); see Truong, 98 F. Supp. 2d at 1098 ("[T]he Agency may not rest on evidence that would require a jury to speculate that the defendant possessed [material, nonpublic] information." (emphasis omitted)).

Given Hill's trades, the Division argues that I should infer that both Andrew and Murphy were lying. But there is no basis to infer that either Andrew or Murphy were lying, let alone to conclude that they both were. In light of their credible testimony denying the Division's allegations, the Division has not carried its burden of proof. For the sake of completeness, I nonetheless address the Division's arguments below.

This evidence is hardly "overwhelming." There is no basis to infer that, because it was possible for Andrew to disclose confidential information to Murphy, Andrew actually did so. Indeed, the fact that Andrew stood to lose millions of dollars, not to mention his job, reputation, and freedom, if he disclosed information about the merger to Murphy, cuts against the inference the Division seeks to draw. And, only if one assumes that which the Division seeks to prove- that Andrew told Murphy about the negotiations-does this evidence weigh in favor of determining that Andrew lied and possibly perjured himself during the hearing. 22 

The Division says that "[c]ommon sense dictates that, given the significant impact of the merger on [Andrew's] life, he would seek the guidance of his closest friend and spiritual adviser." Div. Br. at 32-33. I have no doubt that a dose of common sense can be useful in assessing credibility and the way people commonly interact.23 It is not clear, however, why common sense would dictate that Andrew would risk so much to divulge confidential information to a man with little financial acumen. Perhaps he would if he had nothing to lose by doing so. But Andrew, who has no history of securities violations, had much to lose by doing so.

2.3.2 Andrew's alleged hostility 

The Division next says that Andrew was hostile toward it during the hearing. Div. Br. at 33. There are a few problems with this argument. First, I watched Andrew's demeanor and listened to his testimony over parts of two days. I saw no evidence of hostility. 

Second, although demonstrated hostility toward a party may affect a witness's credibility, see United States v. Haggett, 438 F.2d 396, 400 (2d Cir. 1971), even if Andrew had shown hostility, which he did not, he might have had reason to resent being called to testify. This is particularly so if he suspected that the end result of his testimony would be the Division accusing him of being dishonest or involved in an insider trading scheme. After all, Andrew testified that he spent $20,000 of his own money complying with the Division's subpoena for documents. Tr. 576, 649, 713. He no doubt spent more than that retaining counsel who represented him during the investigation and his investigative deposition and who accompanied him to the hearing. See Tr. 573. One might expect that a person in Andrew's situation would not appreciate being implicated in the Division's investigation and spending tens of thousands of dollars as a result.

1.4 The hearing 

In November 2016, I granted the Division's motion in limine to prevent Hill from calling one of the Division's counsel to testify in support of certain constitutional arguments he had raised. Charles L. Hill, Jr., Admin. Proc. Rulings Release No. 4399, 2016 SEC LEXIS 4424 (ALJ Nov. 29, 2016). During a prehearing conference held a week later, I offered Hill's counsel the opportunity at the start of the hearing to make a proffer regarding Hill's constitutional claims. Prehr'g Tr. 35. Counsel accepted the offer and during the hearing preserved equal protection and due process arguments. Tr. 11-16. During the proffer, counsel referenced alleged differences in success rates that the Division enjoys in administrative proceedings as compared to when it litigates in district court.12 Tr. 12, 14. When I asked counsel for the basis for this statement, he referenced the Wall Street Journal.¹³ Tr. 14. When I asked counsel whether he had reviewed the later law review articles questioning the validity of the statistics reported by the Wall Street1.4 The hearing In November 2016, I granted the Division's motion in limine to prevent Hill from calling one of the Division's counsel to testify in support of certain constitutional arguments he had raised. Charles L. Hill, Jr., Admin. Proc. Rulings Release No. 4399, 2016 SEC LEXIS 4424 (ALJ Nov. 29, 2016). During a prehearing conference held a week later, I offered Hill's counsel the opportunity at the start of the hearing to make a proffer regarding Hill's constitutional claims. Prehr'g Tr. 35. Counsel accepted the offer and during the hearing preserved equal protection and due process arguments. Tr. 11-16. During the proffer, counsel referenced alleged differences in success rates that the Division enjoys in administrative proceedings as compared to when it litigates in district court.12 Tr. 12, 14. When I asked counsel for the basis for this statement, he referenced the Wall Street Journal.13 Tr. 14. When I asked counsel whether he had reviewed the later law review articles questioning the validity of the statistics reported by the Wall Street Journal, he responded that he was not aware of the articles and that the Division had not disputed the reported statistics. Tr. 15. I thus later referred counsel to the law review articles.¹⁴ Tr. 144

Footnote 13: 13 Presumably, counsel was referencing a May 2015 article. See Jean Eaglesham, SEC Wins with In-House Judges, The Wall Street J., May 6, 2015.

Footnote 14: See Urska Velikonja, Reporting Agency Performance: Behind the SEC's Enforcement Statistics, 101 Cornell L. Rev. 901, 976 (2016) ("After . . . add[ing]" the "dozens of contested court cases" the Commission wins in district court on motion but which the Wall Street Journal article omitted, "defendants' odds of prevailing against the SEC are the same in court and before an ALJ."); David Zaring, Enforcement Discretion at the SEC, 94 Tex. L. Rev. 1155, 1189 (2016) ("[T]here is no statistically significant distinction between the rates of success."); see also Joseph A. Grundfest, Fair or Foul?: SEC Administrative Proceedings and Prospects for Reform Through Removal Legislation, 85 Fordham L. Rev. 1143, 1178 (2016) ("[T]he data suggest that, in the aggregate, the Commission has no particular advantage or disadvantage in federal court or before an ALJ.").

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