SECURITIES AND EXCHANGE COMMISSION v. HOLLEY et al
MEMORANDUM OPINION and ORDER that Defendant's Motion to vacate the Consent Judgment entered in this matter pursuant to Federal Rule of Civil Procedure 60(b) [Dkt. No. 55 ] is DENIED. Signed by Magistrate Judge Douglas E. Arpert on 9/21/2015. (mmh)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
SECURITIES AND EXCHANGE
GEORGE H. HOLLEY, et al.,
Civil Action No. 11-0205 (DEA)
ARPERT, Magistrate Judge
This matter comes before the Court on a Motion by Defendant George H. Holley
(“Defendant”) to vacate the settlement agreement and consent judgment entered in this matter on
December 8, 2014 (the “Consent Judgment”) pursuant to Federal Rule of Civil Procedure 60(b).
See Dkt. No. 55. Plaintiff the Securities and Exchange Commission (the “SEC”) opposes
Defendant’s Motion. See Dkt. No. 57. For the reasons set forth below, Defendant’s Motion to
vacate the Consent Judgment is DENIED.
BACKGROUND AND PROCEDURAL HISTORY
Defendant is the co-founder and former Chairman of the Board of Home Diagnostics,
Inc. (“HDI”), a company whose shares traded on the NASDAQ stock exchange. On January 31,
2011, the SEC filed its Complaint in the present action (the “Civil Action”) against Defendant
for insider trading in violation of Sections 10(b) and 14(e) of the Securities and Exchange Act. 1
In addition to Defendant Holley, the Complaint named as Defendants Steven V. Dudas and Phairot Iamnaita.
Consent judgments as to Defendant Dudas and Defendant Iamnaita were entered on June 21, 2013 and May 30,
2014. See Dkt. Nos. 43, 46.
See Dkt. No. 1. In its Complaint, the SEC alleges that between December 2009 and January
2012, Defendant illegally shared material nonpublic information regarding the impending
acquisition of HDI with six individuals (the “Tippees”) with the intent that the Tippees purchase
HDI stock on the basis of Defendant’s tips. Compl. at ¶ 1. According to the SEC, the Tippees
purchased HDI stock on the basis of the inside information provided by Defendant. Id. On
February 2, 2010, HDI publicly announced that it had signed a merger agreement with Nipro
Corporation (“Nipro”) whereby Nipro would acquire all of HDI’s outstanding common stock. Id.
at ¶ 2. Following the announcement of the merger, the price of HDI’s common stock increased
by eighty-nine percent and the Tippees sold their HDI shares resulting in a collective profit of
approximately $250,000. Id.
On February 4, 2011, an Indictment was returned against Defendant based on the same
conduct alleged in the Civil Action. See Crim. Action. No. 11-66 (the “Criminal Action”). On
July 20, 2011, the Government moved to intervene in the Civil Action and for an order staying
discovery of the Civil Action pending the completion of the Criminal Action. See Dkt. No. 19.
The Court granted the Government’s Motion on August 19, 2011, and the Civil Action was
stayed pending the outcome of the criminal proceedings against Defendant. See Dkt. No. 26.
Trial of the Criminal Action began on July 30, 2012, and on August 8, 2012, after seven days of
trial, Defendant pled guilty to two counts of securities fraud and the remaining counts were
dismissed. 2 See Crim. Action No. 11-66, Dkt. No. 137. The two counts to which Defendant pled
guilty charged Defendant with securities fraud through insider trading by disclosing confidential
information regarding the anticipated merger to Defendant’s cousin, Robert Hahn-Baiyor, and
Defendant’s close personal friend, Phairot Iamnaita. Id. Specifically, Defendant admitted to
Defendant was sentenced to a three year term of probation and assessed a fine of $260,000.
disclosing material non-public information concerning the anticipated acquisition of HDI by
Nipro to Mr. Hahn-Baiyor and Mr. Iamnaita with the understanding that they would use that
information to purchase shares of HDI stock, and Mr. Hahn-Baiyor and Mr. Iamnaita then used
the information disclosed by Defendant to purchase HDI stock. Id.
Following the conclusion of the Criminal Action, the Civil Action was reopened. See
Dkt. No. 30. On December 5, 2014, the SEC filed a Motion for the entry of a final judgment, by
consent, as to Defendant, in which Defendant acknowledged his guilty plea in the Criminal
Action and the underlying facts of his plea that Defendant committed insider trading with respect
to Mr. Hahn-Baiyor and Mr. Iamnaita. See Dkt. No. 51. On December 8, 2014, the Court entered
the proposed final judgment (the “Consent Judgment”), under which Defendant is:
(1) enjoined from violation Section 10(b) of the Exchange Act and Rule 10b-5
(2) enjoined from violation Section 14(e) of the Exchange Act and Rule 14e-3
(3) prohibited from acting as a director or officer of any company with securities
registered under Sections 12 or 15(d) of the Exchange Act.
See Dkt. No. 52. In addition, Defendant agreed to pay a monetary penalty of $386,193 which has
since been paid in full by Defendant. Id.
Two days after the Consent Judgment was entered by the Court, the United States Court
of Appeals for the Second Circuit issued is ruling in United States v. Newman, 773 F.3d 438 (2d
Cir. 2014). Subsequently, on February 22, 2015, Defendant filed the present Motion to vacate the
Consent Judgment under Rule 60(b), arguing that the conduct to which Defendant pled guilty in
the Criminal Action and admitted in the Civil Action, specifically insider trading through Mr.
Hahn-Baiyor and Mr. Iamnaita, is no longer illegal according to the holding in Newman. In
opposition, the SEC argues that the Second Circuit’s decision in Newman did not legalize
Defendant’s prior conduct and that no equitable factors, including the Newman decision, provide
any grounds for relief from the Consent Judgment under Rule 60(b).
A. Federal Rule of Civil Procedure 60(b)
Under Rule 60(b), “the court may relieve a party . . . from final judgment, order or
proceeding” under certain circumstances. The general purpose of Rule 60(b) is “to strike a
proper balance between the conflicting principles that litigation must be brought to an end and
that justice must be done.” Walsh v. Krantz, 423 F. App'x 177, 179 (3d Cir. 2011) (quoting
Boughner v. Sec'y of Health, Educ. & Welfare, 572 F.2d 976, 977 (3d Cir. 1978)). “Rule 60(b) is
a provision for extraordinary relief and may be raised only upon a showing of exceptional
circumstances.” Mendez v. Sullivan, 488 F. App'x 566, 568 (3d Cir. 2012) (citing Sawka v.
Healtheast, Inc., 989 F.2d 138, 140 (3d Cir.1993)). The Third Circuit “has emphasized that, by
signing a consent decree, signatories make a free, calculated and deliberate choice to submit to
an agreed upon decree rather than seek a more favorable litigated judgment.” Democratic Nat’l
Comm. v. Republican Nat’l Comm., 673 F.3d 192, 201 (3d Cir. 2012) (citations omitted).
Rule 60(b)(5) provide,s in relevant part, that a court “may relieve a party . . . from a final
judgment, order or proceeding” if “it is based on an earlier judgment that has been reversed or
vacated; or applying it prospectively is no longer equitable.” Fed. R. Civ. P. 60(b)(5). A party
seeking to modify a consent decree must establish, by a preponderance of the evidence: “(1) a
significant change in factual conditions; (2) a significant change in law; (3) that ‘a decree proves
to be unworkable because of unforeseen obstacles’; or (4) that ‘enforcement of the decree
without modification would be detrimental to the public interest.’” Democratic Nat’l Comm.,
673 F.3d at 202 (quoting Rufo v. Inmates of Suffolk Cnty. Jail, 502 U.S. 367, 384 (1992)). A
decree “may be modified if ‘law has changed to make legal what the decree was designed to
Rule 60(b)(6) is a catch-all provision which provides that a party may be relieved from a
final judgment or order for “any other reason that justifies relief” and provides “a grand reservoir
of equitable power to do justice in a particular case.” Hall v. Cmty. Mental Health Ctr., 772 F.2d
42, 46 (3d Cir. 1985) (internal quotation marks omitted). Courts are directed to dispense their
broad powers under Rule 60(b)(6) only in “extraordinary circumstances where, without such
relief, an extreme and unexpected hardship would occur.” Cox v. Horn, 757 F.3d 113, 120 (3d
Cir. 2014) (citing Sawka v. Healtheast, Inc., 989 F.2d 138, 140 (3d Cir. 1993)). A change in the
law can qualify for relief under Rule 60(b)(6). See AARP v. E.E.O.C, 390 F.Supp.2d 437, 443
(E.D. Pa. 2005). However, the Third Circuit has held that “intervening changes in the law rarely
justify relief from final judgments under 60(b)(6).” Cox, 757 F.3d at 121 (emphasis in original).
Here, Defendant contends that Newman “undoubtedly represents a significant and
intervening change in the law” which warrants vacating the consent judgment entered into by the
parties. Dkt. No. 55 at p. 12. Accordingly, the Court must determine whether the Second
Circuit’s decision in Newman constitutes a significant change in the law which made legal what
the consent judgment in this matter was designed to prevent under Rule 60(b)(5) or an
intervening change in the law which qualifies for relief under Rule 60(b)(6).
B. The Newman Decision
In Newman, the Second Circuit summarized the elements of criminal liability for a tipper
(1) the insider tippers . . . were entrusted the duty to protect
confidential information, which (2) they breached by disclosing
[the information] to their tippee . . . , who (3) knew of [the tippers’]
duty and (4) still used the information to trade a security or further
tip the information for [the tippee’s] benefit, and finally (5) the
insider-tippers benefitted in some way from their disclosure.
Newman, 773 F.3d at 448.
The “personal benefit” requirement for tippee liability derives from Dirks v. S.E.C., 463
U.S. 646 (1983). In Dirks, the Supreme Court defined a “personal benefit” constituting a breach
of fiduciary duty as “a pecuniary gain or a reputational benefit that will translate into future
earnings” as well as the benefit an insider would obtain by “mak[ing] a gift of confidential
information to a trading relative or friend.” Id at 663-64. In Newman, the Second Circuit clarified
that although the standard for a personal benefit is “permissive . . . the mere fact of a friendship,
particularly of a casual or social in nature”, does not constitute proof the receipt of a personal
benefit. Newman, 773 F.3d at 452. The Court then held that:
To the extent Dirks suggests that a personal benefit may be
inferred from a personal relationship between the tipper and tippee,
where the tippee’s trades resemble trading by the insider himself
followed by a gift of the profits to the recipient . . . we hold that
such an inference is impermissible in the absence of proof of a
meaningfully close personal relationship that generates an
exchange that is objective, consequential, and represents at least a
potential gain of pecuniary or similarly valuable nature. In other
words . . . this requires evidence of a relationship between the
insider and the recipient that suggests a quid pro quo from the
latter, or an intention to benefit the latter.
Id. (internal citations and quotations omitted).
Defendant contends that because he did not intend to receive “at least a gain of pecuniary
or similarly valuable nature” when he provided confidential information to Mr. Iamnaita and Mr.
Hahn-Baiyor, he is no longer liable for the conduct to which he pled guilty under Newman and
accordingly, the Consent Judgment should be vacated under Rule 60(b).
Defendant contends that the Second Circuit’s decision in Newman legalized the conduct
which formed the basis of the Criminal Action and the Civil Action against Defendant and
therefore constitutes a significant change in law warranting vacating the Consent Judgment under
Rule 60(b). 3 In opposition, the SEC argues that Newman did not legalize Defendant’s conduct
and is an improper basis for relief under Rule 60(b). Upon examination of the Newman decision
as applied to the particulars of Defendant’s case, the Court finds that Defendant has failed to
demonstrate any extraordinary circumstances or other equitable factors qualifying for relief
under Rule 60(b).
According to Defendant, his admitted actions in disclosing confidential information
regarding the upcoming merger to his cousin and long-time confidant, with the intention to help
these individuals, did not constitute insider trading because Defendant did not expect to receive
any “pecuniary or similar value in return.” Therefore, Defendant argues that the continued
enforcement of the Consent Judgment is “particularly inequitable . . . because it is based on
conduct that Newman has found to be lawful” and will cause Defendant to suffer hardship in the
form of “personal humiliation and business embarrassment by precluding or limiting
[Defendant’s] service on corporate boards and other bodies.” Dkt. No. 55 at p. 16.
While Defendant may not have disclosed the subject confidential information to Mr.
Hahn-Baiyor and Mr. Iamnaita with the intent to receive a tangible benefit in return, Defendant
has repeatedly acknowledged that the information was disclosed for the purpose of benefitting
As to Defendant’s argument that his agreement to the Consent Judgment was “based” on his guilty plea in the
Criminal Action, and that his guilty plea in the Criminal Action was “premised on the erroneous reading of insider
trading law embodied in the district court’s proposed jury instruction that a personal benefit was not an essential
element of [insider trading]”, the Court notes that the Court’s proposed jury instruction did in fact include a benefit
to the tipper as a required element of insider trading. See Dkt. No. 55, Marino Cert. at Ex. 4.
these individuals, one of whom is related to Defendant and one with whom Defendant shares a
close personal relationship. Defendant’s intent to benefit and help people close to him is
precisely the type of personal benefit the Second Circuit referred to in Newman when it stated
that a personal benefit may be established by “evidence of ‘a relationship between the insider
and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the
[latter].’” Newman, 773 F.3d at 452 (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir.
Here, the proof a personal benefit to Defendant is not evidenced by “the mere fact of a
friendship, particularly of a casual or social nature” such as the relationship between “two
individuals [who] were alumni of the same school or attended the same church.” Newman, 773
F.3d at 452. Instead, the proof of a personal benefit to Defendant exists in Defendant’s repeated
admission that he shared the confidential information regarding the merger with his “companion”
and his first cousin with the intent to confer a benefit on them. While Defendant contends that
there is no liability for insider trading absent a pecuniary benefit to the tipper, as observed by the
Ninth Circuit in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015), if Newman can be read
to require the receipt of some tangible benefit for insider trading liability, “then a corporate
insider or other person in possession of confidential and proprietary information would be free to
disclose that information to [their] relatives, and they would be free to trade on it, provided only
that [they] asked for no tangible compensation in return.”
Although Defendant argues that Newman extinguished liability for the conduct to which
he pled guilty in the Criminal Action and accepted responsibility in the Civil Action, the Court
finds that Defendant’s actions in disclosing confidential information to his “companion” and his
first cousin with the intent to confer a benefit upon those individuals constitutes a personal
benefit giving rise to liability for insider trading under the Second Circuit’s decision in Newman.
Therefore, the Court finds that Defendant has failed to establish that the Second Circuit’s
decision in Newman constitutes a significant change in the law which makes legal the conduct
for which Defendant accepted liability or that any intervening change in the law presented by the
Newman decision represents an extraordinary circumstance justifying relief from the Consent
Judgment entered in this matter. Accordingly, because the Court finds, upon examination of the
particulars of Defendant’s case, that Defendant has failed to demonstrate any grounds for relief
under Rule 60(b), Defendant’s Motion to vacate the Consent Judgment entered in this matter is
CONCLUSION AND ORDER
The Court having considered the papers submitted and oral argument by counsel, and for
the reasons set forth above;
IT IS on this 21st day of September, 2015,
ORDERED that Defendant’s Motion to vacate the Consent Judgment entered in this
matter pursuant to Federal Rule of Civil Procedure 60(b) [Dkt. No. 55] is DENIED.
/s/ Douglas E. Arpert
DOUGLAS E. ARPERT
United States Magistrate Judge
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