U.S. court ruling challenges SEC’s circumstantial insider trading evidence

chairs in a courtroom

Insider trading allegations are often challenging to pursue to successful conclusion by regulators and prosecutors. The degree of proof usually requires regulators to rely on circumstantial evidence, leaving adjudicators to determine whether it is sufficient to ground a finding of unlawful conduct or activity. On December 13, 2021, the United States Securities and Exchange Commission (SEC) experienced a setback in its approach to relying on circumstantial evidence of “suspicious” trading to convince an adjudicator to draw the inference of a securities violation. A federal judge in Virginia found that the regulator failed to offer persuasive circumstantial evidence to prove that a mortgage banker traded on illicit tips from his brother-in-law about merger negotiations at his information technology advisory company.

This decision from the bench signals the importance of the evidentiary burden that U.S. regulators must overcome in order to succeed in proceedings alleging insider trading and/or tipping. Compared to their U.S. counterparts, Canadian authorities have already had a harder time establishing a meaningful track record of insider trading enforcement. Similar issues may yet play out on this side of the border as Canadian securities regulators pursue tipping and insider trading cases in an uncertain legal landscape when it comes to circumstantial evidence.

Background: Statistical anomalies do not necessarily mean illegal trading

In United States Securities and Exchange Commission v. Christopher Clark and William Wright, Civil Action No. 1:20-cv-01529 (E.D. Va.) — an insider trading case brought based on circumstantial evidence — the U.S. District Court for the Eastern District of Virginia granted a defence motion and dismissed the SEC’s case [PDF], following the completion of the SEC’s arguments at trial and, extraordinarily, before the defence presented their case.

Christopher Clark (Clark), a mortgage banker, and his brother-in-law, William Wright (Wright), formerly a corporate controller at CEB Inc. (CEB), were named as defendants in the case. The US$2.6-billion acquisition of CEB by Gartner, Inc., announced on January 5, 2017, was the focal point of the investigation, with the SEC alleging that Clark's suspicious trading [PDF], including his “extraordinary efforts to raise cash for these purchases,” constituted illegal insider trading.[1] The SEC flagged the repeated contacts between the two men “by phone, text, and in person, including while Clark coached their daughters’ basketball team and at family holiday events,” to support its inference of illicit conduct.[2] Wright consented to a final judgment against him in October 2021, without admitting or denying any of the SEC’s tipping allegations.

After the SEC completed its arguments at trial, Clark’s counsel brought a motion for judgment as a matter of law (the Rule 50 Motion). The basis for the Rule 50 Motion was that the SEC had not created a robust evidentiary record to prove its case before a jury. U.S. District Judge Claude M. Hilton dismissed the case without written reasons, concluding that the SEC had failed to meet its burden of proof by providing insufficient evidence that Clark had traded on material, non-public information (MNPI) from his brother-in-law.

In insider trading cases, securities regulators typically rely on patterns of circumstantial evidence which emphasize the relationship between the person engaged in the trading and a corporate insider to create the inference of insider trading for the trier of fact, who performs the ultimate weighing of the evidence. This ruling may have implications for the SEC’s insider trading strategy and, specifically, its reliance on market surveillance tools and statistical data without a “smoking gun” (i.e., direct evidence such as explicit witness testimony or documentary proof such as emails where MNPI is divulged). It may influence the regulator’s approach to insider trading enforcement, which has been a perennial focus of its Division of Enforcement.

Reliance on circumstantial evidence to prove insider trading in Canada

Canadian courts have applied differing approaches to the evidentiary burden in insider trading cases and, specifically, reliance on circumstantial evidence to meet that burden. For example, in Walton v. Alberta (Securities Commission), 2014 ABCA 273 (Walton) (leave to appeal refused by the Supreme Court of Canada), the Alberta Court of Appeal ruled that although charges of illegal trading can be proven by drawing inferences from circumstantial evidence, speculation and conjecture are not the equivalent of proper inferences.[3] The Court challenged certain inferences relied upon by the regulator and emphasized the standard of “clear and cogent evidence” given the serious consequences of a finding of culpability.[4]

A few years later in Finkelstein v. Ontario Securities Commission, 2018 ONCA 61 (Finkelstein) (leave to appeal also refused by the Supreme Court of Canada), the Ontario Court of Appeal reinvigorated Canadian securities regulators in their pursuit of insider trading and tipping enforcement and served as a cautionary reminder to capital market participants to think twice before acting on a tip or discussing MNPI. This case reaffirmed the reasonableness of finding insider trading/tipping liability based on circumstantial evidence, highlighting that there is often a lack of direct evidence in these types of cases.[5]

More recently, the Ontario Securities Commission’s (OSC) decision in Re Hutchinson, 2019 ONSEC 36 (Hutchinson), involving allegations of insider trading and tipping against a Toronto-based professional trader, was fairly categorical: “clear, convincing and cogent evidence” is a prerequisite to proving such allegations and “if Staff fails to [meet this burden], or if a respondent presents an alternative explanation that is as likely as the explanation asserted by Staff, then Staff will not have met its burden”.[6] (See our previous posts on the allegations and the OSC’s settlement.)


The SEC’s next steps remain to be seen, including whether the agency will appeal the judge’s order in Clark and what the impacts, if any, of the motion decision will be on the SEC’s short- and long-term insider trading and tipping prosecutorial strategy. It is also unclear whether other federal judges will follow in U.S. District Judge Hilton’s footsteps. With the passing of the Insider Trading Prohibition Act (H.R. 2655, 117th Cong.) in the U.S. House of Representatives in May 2021, there may be more uniformity and certainty on the horizon for a prosecution framework that has largely been constructed by judge-made law in the U.S.

On the Canadian side of the border, while Finkelstein provided an appellate court’s take on the factors that could be considered by securities commissions in making a determination of insider trading and tipping liability, the line between acceptable inference and speculation is far from clear. It will be interesting to see whether Canadian regulators take note of the decision in Clark on the use of circumstantial evidence in insider trading cases.

[1] See SEC’s Complaint in United States Securities and Exchange Commission v. Christopher Clark and William Wright, Civil Action No. 1:20-cv-01529 (E.D. Va.), para. 7.

[2] Ibid, para. 3.

[3] Walton, paras. 25-26.

[4] Ibid, paras. 28-29.

[5] Finkelstein, para. 58.

[6] Hutchinson, paras. 56-57.