On April 18, 2017, Securities and Exchange Commission (“SEC” or “Commission”) Administrative Law Judge (“ALJ”) James Grimes dismissed an administrative proceeding instituted by the Commission against Georgia real estate developer Charles Hill, Jr. alleging that Hill engaged in insider trading.  In the Matter of Charles L. Hill, Jr., Admin. Proc. No. 3-16383 (Apr. 18, 2017).  In the course of the administrative proceeding, the SEC’s Enforcement Division argued that Hill had traded on material, nonpublic information about a tender offer while having reason to know that the information came from an officer of the target company.  After a full hearing on the merits, however, ALJ Grimes dismissed the administrative proceeding, concluding that the Enforcement Division had not met its burden of proof because its arguments rested too heavily on speculation. 

The Enforcement Division alleged that in June and July 2011, Hill purchased several thousand shares of stock in Radiant Systems, Inc. (“Radiant”) shortly before Radiant announced a merger with NCR Corporation on July 11, 2011.  Hill then allegedly sold all of his Radiant shares the next day and reaped profits of approximately $744,000.  Although Hill maintained that he was unaware of the merger before it was announced, the Commission instituted a contested administrative proceeding in February 2015 after a two-year investigation. 

ALJ Grimes held a merits hearing on the matter from December 12–15, 2016, which included testimony from seven witnesses and the admission of nearly two dozen exhibits.  The Enforcement Division’s theory of the case was that Hill learned of the tender offer from a friend, who in turn had learned it from an officer of Radiant, and that Hill had sufficient reason to know that the ultimate source of the information was the officer.  After delving deep into the testimony he heard and his impressions of witness credibility, however, ALJ Grimes concluded that the Enforcement Division simply had not met its burden of proof.  AJL Grimes concluded that each of the witnesses involved had credibly testified that they did not pass inside information to Hill; and, absent some other evidence, ALJ Grimes held that evidence of Hill’s suspicious trading was not enough to carry the burden because it did not speak to whether Hill had reason to know that any nonpublic information he possessed ultimately came from an officer of Radiant.  In so holding, ALJ Grimes was highly critical of what he deemed to be the Enforcement Division’s request that he reject consistent witness testimony (that no inside information had been passed to Hill) in favor of speculation (that Hill would not have made the well-timed trade without knowingly possessing inside information).

Notably, ALJ Grimes’s ruling on the merits came after Hill had unsuccessfully sought to enjoin the administrative proceeding on the grounds that SEC’s hiring of ALJ Grimes had violated the Appointments Clause of Article II of the Constitution.  Hill first asked ALJ Grimes to dismiss the case because ALJs are “Inferior Officers,” or “government officials exercising significant authority pursuant to the laws of the United States,” who must be appointed by the President, the federal courts, or the heads of federal departments.  After ALJ Grimes denied Hill’s constitutional challenge, Hill filed a complaint in the United States District Court for the Northern District of Georgia.  There, in Hill v. SEC, Judge Leigh Martin May granted Hill a preliminary injunction.  Hill v. SEC, 114 F. Supp. 3d 1297 (N.D. Ga. 2015).  The Eleventh Circuit reversed, however, on the grounds that the district court lacked subject matter jurisdiction over the challenge.  Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016).  Ultimately, the fact that the case remained before ALJ Grimes may have proved beneficial to Hill.

This marks the second time that an ALJ has dismissed an insider trading case in the last 18 months, and it comes amidst an apparent trend of the SEC bringing fewer contested actions before ALJs—particularly outside of actions involving regulated entities and persons.  We expect the SEC’s trend of shying away from administrative proceedings for contested actions to continue, particularly with the expected confirmation of nominee for SEC Chairman Jay Clayton.  At the very least, the Commission may be discouraged from bringing insider trading cases before ALJs.