SEC Fails to Convince Jury of Insider Trading

A federal district court jury in Georgia tossed out an SEC civil suit brought against three men, clearing them of allegations they'd violated insider trading laws by using information from one man's wife to make money in the stock market. Defense attorneys saw the acquittal as an affirmation that insider trading laws can't be extended to impose a fiduciary duty on spouses who share information about a public company.

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A woman in Alpharetta, Ga. confided to her husband in 1997 that she might lose her job because her employer, VeriFone Inc., was going to merge with Hewlett-Packard. The woman, Amy Goodson, heard about the merger from an intoxicated supervisor on a company retreat, according to testimony in a federal court in Atlanta. Goodson confided her fears about losing her job in the Atlanta office of VeriFone to her husband, Floyd P. Goodson. That, with the supervisor’s remarks — which he doesn’t remember, according to court testimony — spurred a three-year insider trading investigation of Floyd Goodson, his father and a friend of the father by the U.S. Securities and Exchange Commission. On Dec. 7, a district court jury tossed out the SEC’s civil case against the three men, clearing them of allegations that they had violated laws against insider trading when they made a quick killing in the stock market using the merger information Amy Goodson had told to her husband. SEC v. Goodson, 1:99-CV-2133 (N.D. Ga. Dec. 7, 2001). Defense attorneys saw the acquittal as an affirmation that insider trading laws can’t be extended to impose a fiduciary duty on spouses who share information about a public company. Nor do federal laws, they say, prohibit family members from passing along stock trading tips to each other. The acquittal was a setback to the SEC’s effort to gain a favorable ruling on the issue. The SEC was seeking to collect $62,374 in profits that Goodson’s father-in-law, James F. “Jeff” Goodson, made and $146,907 in profits made by his friend, John R. Fiser. The men earned the profits when they bought and then traded VeriFone options within 24 hours of the merger. The SEC also was seeking treble damages from the defendants. Goodson is the president and chief executive officer of Goodson Brothers Coffee Co. in Knoxville, Tenn. After the trial, which was presided over by U.S. Senior District Judge Marvin H. Shoob of the Northern District of Georgia, defense lawyers castigated the SEC for bringing the case. “I think they [SEC attorneys] were trying to expand the reach of insider trading laws to prohibit any kind of insider trading on anything someone might have learned from a family member,” says Knoxville, attorney Wade V. Davies of Ritchie, Fels & Dillard. Davies and firm partner Robert W. Ritchie defended Floyd and James Goodson. The SEC never sought civil damages against Amy Goodson, who divorced her husband in 1998 for reasons unrelated to the case, Ritchie says. NEW YORK CASE But SEC spokeswoman Helane L. Morrison says the agency pressed the case because insider trading “often involves friends or relatives.” And, she says, SEC attorneys believed that a federal ruling in New York handed down about the time the agency began investigating the Goodson/Fiser trades “was wrong and shouldn’t govern the rest of the country.” In that case, a federal judge determined that information regarding a public company shared between a husband and wife did not carry with it a fiduciary duty of confidentiality that could be the basis for an insider trading case, Morrison says. The opinion of the 2nd U.S. Circuit Court of Appeals said that for insider trading allegations to attach, “you either have to have a history of sharing business communications that are confidential in nature or an explicit agreement before the husband and wife would have a kind of duty that would be considered actionable,” Morrison says. Since then, the SEC has approved regulations that say a husband and wife do have a fiduciary duty to keep confidential within the marriage any insider information that they may have gleaned at work, according to Morrison. Morrison is district administrator of the SEC’s San Francisco office where the case against the Goodsons and Fiser originated. California attorneys for the SEC prosecuted the case in Atlanta. “We think insider trading cases are important to keep the markets honest. What happens with insider trading is that people cheat, and they get to make a lot of money, whereas regular investors don’t get that opportunity.” ‘TERRIBLE ORDEAL’ Ritchie insists neither the Goodsons nor Fiser ever believed they had done anything wrong. When SEC investigators questioned them more than a year after the VeriFone/Hewlett-Packard merger, the men told them exactly how they came to make the trades. The resulting three-year litigation was “a terrible ordeal,” Ritchie says. “Had the SEC been successful, it would have placed a large cloud of paranoia over the general investing public.” The SEC investigation focused on what happened after Amy Goodson made her worried telephone call to her husband on April 21, 1997, regarding the possible impact of the VeriFone/Hewlett-Packard merger. Attorneys told the eight-person jury during closing arguments that Floyd Goodson called his father later that night and passed along to him the information that his wife had said “something positive” was about to happen to the firm’s stock. Defense lawyers contend that the word “merger” was never mentioned. Jeff Goodson called his friend, Fiser, and passed along the tip on April 22, 1997. Both Jeff Goodson and Fiser bought short-term stock options, gambling that within 30 days, the stock would rise from $27 to $30. The next day, California-based HP announced that it would acquire VeriFone, also based in California, in a stock swap worth more than $1 billion. VeriFone stock prices rocketed to $47. SEC staff monitoring trades in the days following the merger first spotted the Goodson and Fiser stock deals. Fiser and Goodson “weren’t investing in a company. They were investing in an event,” SEC trial lawyer John S. Yun told the jury. “Jeff Goodson never tried to see if he was prohibited from doing what he was doing. He went ahead and just made money.” Davies countered in his argument before the jury that, “It’s not illegal to make money in this country. The law doesn’t prevent trading on a tip.” And a tip, rather than confidential company information, was all that Jeff Goodson and Fiser had, he said. Ritchie called the litigation an “unfounded, ill-founded lawsuit” the outcome of which would determine “to what extent will government agencies be allowed to stretch government regulations beyond the bounds for which those regulations were intended. … There is no reason to forego trading just because one possesses material, non-public information. The law says only when there has been a breach of duty” do regulations regarding insider trading attach. “What Floyd told his dad was not real insider information,” Ritchie told the jury. “All he told him was that something was going on at VeriFone and if he had a little something, he might invest. … That’s a stretch, folks, beyond the law.”

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