Jury Rejects Aggressive SEC Insider Trading Claims

The SEC lost another jury trial. Following a nine day trial the jury rejected each of the Commission’s claims in the aggressive insider trading case SEC v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Verdict Jan. 27, 2014). This action was one of several brought by the Commission which seemed to be redrawing the boundaries of what constitutes insider trading. It is also one of a number of trial losses suffered recently by the agency.

The case centers on trading by a group of family members and their friends, according to the Commission’s complaint. The defendants included: Rex C. Steffes, Cliff Steffes, Rex R. Steffes, Bret W. Steffes, Robert J. Steffes and W. Gary Griffiths. Defendant Gary Griffiths is married to the sister of his high school class mate and longtime friend Rex C. Steffes. Rex C. Steffes has three sons who were defendants: Cliff, Bret and Rex R. His brother is defendant Robert J. Steffes who settled before trial.

The case centered on the acquisition of Florida East Coast Railway, LLC by Fortress Investment Group LLC, announced on May 8, 2007. That transaction traces to December 4, 2006 when Morgan Stanley & Co. was engaged by the board to sell the firm through a targeted auction process. By April 13, 2007 the investment bank had nine separate acquisition proposals. One was from Fortress.

Defendants Gary Griffiths and Cliff Steffes were employed by the rail road during the period of the transaction. Gary and Cliff, according to the complaint, obtained inside information and then tipped the other defendants, each of whom traded. Collectively the trades generated about $1.6 million in profits.

The critical question in the case was how Gary and Cliff Steffes obtained inside information. The SEC claimed that each man acquired that information from their position and through a series of events. The first point is position:

Ø Gary Griffiths was a vice president and chief mechanical officer with an office at the headquarters in Jacksonville. He reported to the COO.

Ø Cliff Steffes was a trainman at the Bowden Rail Yard in Jacksonville. He obtained his position with the assistance of his uncle, Gary Griffiths.

Second, the SEC alleged specific facts and events as to each man. For Gary those were:

Ø In early March the CFO asked him to prepare a comprehensive list of equipment owned by the company;

Ø He became aware that there were an unusual number of yard tours (potential bidders toured);

Ø “He believed” the yard tours were provided to investment bankers for a possible sale;

Ø Employees asked him if the company was being sold and they would lose their jobs; and

Ø He arranged and monitored a rail trip from the Bowden to the Hialeah Yard for Fortress executives in a special rail car reserved for visitors.

For Cliff Steffes the specific facts and circumstances were:

Ø There was an unusual number of yard tours involving people dressed in business attire;

Ø Many employees who had not personally witnessed the tours became aware of them;

Ø Shortly before the tours began a number of employees expressed concern about the company being sold and a loss of jobs; and

Ø The Fortress executives toured the Bowden yard where Cliff Steffes worked.

The Commission’s complaint alleged violations of Exchange Act Section 10(b).

The loss in Steffes is one of several recent setbacks in court for the SEC. In January the Commission lost another insider trading case after a bench trial. SEC v. Schavacho, Civil Action No. 1:12-cv-022557 (N.D. Ga. Decision Jan. 7, 2014). The agency also lost an insider trading claim earlier this year in SEC v. Yang, Case No. 12-cv-02473 (N.D. Ill. Verdict Jan. 13, 2014) although it prevailed on a front running charge. Late last year the SEC lost a financial fraud case following trial in SEC v. Jensen, Civil Action No. CV 11-05316 (C.D. Cal. Verdict Dec. 10, 2013). And, this week a jury rejected most of its claims in another financial fraud action, SEC v. Life Partners Holdings, Inc., Civil Action No. 1-12-cv-00033 (W.D. Tx. Verdict Feb. 3, 2014)(to be discussed in detail tomorrow). These loses continue to undermine a program already reeling from defeats in three of the last four major trials — losses in Primary Reserve Fund, Brian Stoker and Mark Cuban with a win only in Fabrice Tourre.

If the new get tough enforcement approach is going to be effective, it is critical that the SEC reverse this trend and prevail in the courtroom. If the swagger is going to come back, its credibility has to be built on courtroom success. Indeed, threats to go to trial that are not backed by a sold string of victories can only serve to undercut the credibility and effectiveness of the program. Perhaps it is time to reconsider and evaluate the trial program beginning with the charging process.