Securities and Exchange Commission v. Adler

Harvey Pegram (defendant) sold his stock in Comptronix while in possession of material nonpublic information about the company. Pegram did so pursuant to a preexisting plan to sell the stock. The Securities and Exchange Commission (SEC) (plaintiff) sued Pegram, alleging that he violated §§ 10(b) and 17(a) of the Securities Exchange Act of 1934 as well as SEC Rule 10b-5 by engaging in insider trading. The SEC sought treble damages against Pegram pursuant to the Insider Trading Sanctions Act of 1984. The district court granted summary judgment to Pegram on the ground that his preexisting plan to sell the stock rebutted any reasonable inference that he acted with scienter (i.e., an intent to deceive or defraud). The SEC appealed, arguing that the district court erred by requiring it to show that Pegram actually used material inside information in deciding to make his stock sales. Rather, the SEC argued, Pegram’s mere possession of material nonpublic information required him to refrain from trading because it would be difficult in many cases for the SEC to prove that a trader actually used inside information. However, in a prior unrelated administrative proceeding, the SEC conceded that trades made pursuant to a preexisting trading plan would not constitute insider trading even if the trader possessed material nonpublic information when the trades were made.