SEC Strikes Out in the Courtroom…Again

The Securities and Exchange Commission’s (SEC) new “get tough” approach continues to hit roadblocks. While the agency has vowed to take more cases to trial rather than settle, the threat only works if prosecutors are largely successful in the courtroom.

Following the SEC’s loss in the high-profile case against Mark Cuban, the SEC recently suffered another defeat in an insider-trading case. In SEC v. Schvacho, the SEC alleged that Ladislav “Larry” Schvacho made approximately $511,000 in illicit profits by using inside information to trade around the acquisition of Comsys IT Partners Inc. by another staffing company. Schvacho allegedly learned the information as a close personal friend of Comsys CEO, Larry L. Enterline.

To support the insider trading allegations, the SEC offered evidence of telephone conversations, text messages, and social engagements between Schvacho and Enterline that occurred in in temporal proximity to Schvacho’s purchase of Comsys stock.

As detailed in court documents, the SEC offered two theories for how Schvacho acquired the inside information: “(1) that Enterline confided to Schvacho material, non-public information about Comsys and its business plan . . . or (2) that Schavcho obtained material non-pubic information from Enterline indirectly by, for example, overhearing Enterline’s communications with third parties or by accessing confidential information about the potential acquisition that Enterline may have left in a briefcase . . .”

However, the court ultimately concluded that potential access to material nonpublic information, without additional evidence, was insufficient to prove that the defendant actually possessed the insider information in violation of U.S. securities law.

“While this timing is interesting it is not persuasive and does not meet the SEC’s burden of proof. . . The evidence was that Enterline and Schvacho spoke with each other with enormous frequently about matters that Enterline and Schvacho acknowledge concerned mainly their personal relationship and sometimes about the common business venture in which they were involved,” the court stated.

“SEC did not present any evidence, including phone records, to show that the frequency or pattern of communications and the times when Enterline and Schvacho were together was any different during the period when the SEC contends that insider information was misappropriated by Schvacho than it was before the insider trading allegedly began,” the court further noted.

The Bottom Line for New York and New Jersey Businesses

While the case highlights the inherent risks of litigation for both sides, the recent trial losses will likely not deter the SEC’s continued focus on insider trading. The agency can still point to its 908 enforcement actions and record $600 million settlement with SAC Capital to bolster its credibility as a tough regulator.

If you have any questions about this case or would like to discuss insider-trading liability, please contact me or the Scarinci Hollenbeck attorney with whom you work.