991 F. Supp. 2d 1284
N.D. Ga.2014Background
- SEC brought civil insider-trading claims against Ladislav “Larry” Schvacho for trading Comsys IT Partners, Inc. stock before its February 2, 2010 acquisition by Manpower, alleging Schvacho misappropriated material nonpublic information from Comsys CEO Larry Enterline.
- The SEC relied on circumstantial evidence: frequent phone/text contacts and social meetings between Schvacho and Enterline, large Comsys purchases by Schvacho between Nov 9, 2009 and Feb 2, 2010, and a “17.50” notation in Schvacho’s notebook.
- Enterline and Schvacho had a long, close friendship and business relationship; Enterline was found to be Comsys CEO and a credible witness who testified he did not disclose inside information or discuss Comsys matters in others’ presence.
- There was no direct evidence of the content of calls or texts, no testimony that Enterline intentionally shared confidential Comsys information with Schvacho, and no evidence Schvacho accessed documents from Enterline’s belongings.
- After a bench trial, the Court found the SEC’s circumstantial proof insufficient to establish that Schvacho possessed material nonpublic information or traded with scienter, and entered judgment for Schvacho.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Schvacho violated Section 10(b) and Rule 10b‑5 by misappropriating material, nonpublic Comsys information from Enterline and trading on it | Schvacho traded in temporal proximity to communications and meetings with Enterline and thus misappropriated inside information in breach of a duty to Enterline | Enterline never disclosed inside information; communications were frequent and social; no direct evidence of content or that Schvacho had access to confidential information | Court: SEC failed to prove possession of material nonpublic information or scienter by a preponderance; claim dismissed |
| Whether Schvacho violated Section 14(e) and Rule 14e‑3 (tender-offer context) | Same circumstantial evidence shows possession of tender-offer-related nonpublic information and purchases of target securities | No direct proof of acquisition of tender-offer information; same deficiencies as to Section 10(b) claim | Court: SEC failed to prove the required elements; claim dismissed |
Key Cases Cited
- United States v. O'Hagan, 521 U.S. 642 (1997) (misappropriation theory of insider trading)
- Aaron v. SEC, 446 U.S. 680 (1980) (scienter standard discussion)
- SEC v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004) (SEC may rely on circumstantial evidence)
- SEC v. Rorech, 720 F. Supp. 2d 367 (S.D.N.Y. 2010) (potential access alone insufficient to prove possession)
- SEC v. Steffes, 805 F. Supp. 2d 601 (N.D. Ill. 2011) (examples of circumstantial-evidence insider-trading claims)
- SEC v. Michel, 521 F. Supp. 2d 795 (N.D. Ill. 2007) (circumstantial proof in SEC insider-trading litigation)