Securities and Exchange Commission v. Carroll et al

Filing 233

MEMORANDUM ORDER AND OPINION by Senior Judge John G. Heyburn, II on 3/16/2015 -Plaintiff's 230 motion for entry of final judgment against Defendant Stephen Somers is SUSTAINED. The Court will enter the final judgment as agreed by the parties. cc: Counsel(DAK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:11-CV-165-JGH
SECURITIES AND EXCHANGE COMMISSION

PLAINTIFF

v.
STEPHEN P. SOMERS, et al.

DEFENDANTS

MEMORANDUM ORDER AND OPINION
Plaintiff, the Securities and Exchange Commission, filed this civil enforcement action
against Defendant, Stephen Somers, and others in March 2011. The SEC alleged that Somers
engaged in insider trading of Steel Technologies, Inc. securities in violation of federal law. All
other defendants settled, and the Court entered final judgments in accordance with those
settlement agreements.
Somers did not concede so easily. His attorneys mounted a vigorous and virtuous
defense. On the eve of trial, however, Somers did sign an agreement (the “Consent”) to resolve
the SEC’s claims against him by the entry of a final judgment requiring him to pay
disgorgement, prejudgment interest, and a civil penalty. The SEC gave up its right to a trial, did
not require Somers to admit liability, did not to seek an injunction against Somers, and did not
seek the full civil penalty allowed by the law. The Commission had to approve the Consent, so
the Court did not immediately enter a final judgment.
On December 10, 2014, before the Commission approved the Consent, the Second
Circuit issued its decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), a criminal
insider trading case. That court held that the SEC must establish more than the “mere fact of
friendship” between people sharing inside information to satisfy the benefit element in criminal

insider trading cases; instead, the SEC must prove that the tipper must receive something of
“consequence.” Id. at 452. Somers argues that this case represents a big shift in the Second
Circuit’s insider trading jurisprudence and notes that the SEC has requested en banc review.
After the decision, Somers wrote the SEC to request that it drop this case because the
SEC has relied on the fact that the alleged tippers and tippees were friends. The SEC declined.
Somers also requested a telephonic conference with this Court and stated that he would not
object if this court dismissed the case against him sua sponte. This Court declined. Somers
never revoked his settlement offer, perhaps hoping that the SEC would not approve the Consent
in light of the Second Circuit’s decision. He was wrong.
On January 8, 2015, the Commission accepted and approved the terms of the Consent.
The SEC moved to approve the final judgment on the same day. Now, Somers requests this
Court to refrain from consideration of the SEC’s motion until there has been a final judgment in
Newman. For the reasons that follow, the Court denies Somers’s request, sustains the SEC’s
motion, and will enter the final judgment as agreed by the parties.
I.
Contract law governs settlement agreements. See Frear v. P.T.A. Indus., Inc., 103
S.W.3d 99, 105 (Ky. 2003). So when a settlement agreement has all the elements of a contract—
offer, acceptance, full and complete terms, and consideration—it is binding on the parties. See
Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky. App. 2002). When a
settlement agreement is a contract, “each party should receive the benefit of his bargain, and the
contract’s terms must necessarily be interpreted in light of the parties’ reasonable expectations
and understanding of what the agreement means.” Commonwealth v. Morseman, 379 S.W.3d
144, 149 (Ky. 2012) (citations and quotations omitted).

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Here, the SEC and Somers entered into a settlement agreement, the Consent, which
satisfied all of the elements of a contract. When Somers and his attorney signed the Consent on
November 6, they made an offer to the SEC. Somers had ample opportunity to revoke this offer
after Newman, but he chose not to. Revocation would have been risky; had he backed out of the
Consent and lost at trial, a judgment against him could have significantly impacted his career.
So he took a different risk: the risk that the Commission would accept the Consent. This came to
fruition on January 8; the SEC accepted Somers’s offer when it approved the settlement. The
Consent has full and complete terms, including a provision where “Somers agrees that the
Commission may present the Final Judgment to the Court for signature and entry without further
notice.” (DN 230-1, at PageID # 2986.) And the Consent is supported by consideration; both
parties gave up something and received a benefit by agreeing to settle this case. Because the
SEC and Somers were parties to a binding contract on January 8, each should receive the benefit
of its bargain. The Court must honor the parties’ reasonable expectations as reflected in the
terms of the Consent by entering the final judgment.
II.
Even assuming the settlement agreement did not require the Court to enter its final
judgment, there is no reason to delay. Newman could take months to finally resolve, even if (1)
the Second Circuit declines en banc review and (2) the United States does not seek Supreme
Court review. And even then, it would not be binding on this Court. The possibility that, in the
next year or so, (1) the SEC will petition for a writ of certioriari in Newman, (2) the Supreme
Court will agree to hear the case, (3) the Supreme Court will affirm the new benefit standard, (4)
the decision will apply to civil cases, and (5) the SEC will not be able to satisfy the new standard

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in this case does not justify a lengthy stay. No cases would ever be finally resolved if the mere
possibility of a future change in the law warranted prolonged delay.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Plaintiff’s motion for entry of final judgment against
Defendant Stephen Somers is SUSTAINED. The Court will enter the final judgment as agreed
by the parties.

March 16, 2015

cc:

Counsel of Record

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