## Facts

- The SEC brought a civil enforcement action alleging insider trading under Exchange Act § 10(b) and Rule 10b-5 and Securities Act § 17(a), and sought treble civil penalties under the Insider Trading Sanctions Act.
- Harvey L. Pegram, a Comptronix founder, officer, and director, received a substantial block of Comptronix stock and later sold shares in 1989 and 1992.
- For the 1989 trades, the SEC alleged Pegram learned at an August 1989 board meeting that Comptronix’s largest customer was likely to sharply reduce or terminate business and then sold shares in September 1989.
- Pegram asserted the 1989 sales followed a preexisting plan and involved only a small portion of his holdings.
- For the 1992 trades, the SEC alleged that Comptronix director Richard F. Adler learned at a November 1992 board meeting of potentially fraudulent accounting practices.
- The next day, Adler had a brief telephone call with Pegram; within roughly ten minutes after that call, Pegram sold Comptronix shares.
- The SEC alleged Adler tipped Pegram and that Pegram, Adler, and other defendants traded based on the undisclosed accounting information.
- The district court granted summary judgment to Pegram on the 1989 trades and to all defendants on the 1992 trades, effectively requiring proof the defendants actually “used” inside information rather than merely possessed it.

## Issues

1. Whether insider-trading liability under § 10(b) and Rule 10b-5 requires proof that the trader used material nonpublic information, or whether knowing possession at the time of trading is sufficient.
2. Whether summary judgment was proper on the 1989 and 1992 trading claims given the circumstantial evidence and competing inferences.

## Decision

- The Eleventh Circuit rejected a strict “knowing possession” standard and held that § 10(b) and Rule 10b-5 require a causal connection between the information and the trading decision (i.e., “use”).
- The court held that trading while in knowing possession of material nonpublic information supports a strong, rebuttable inference that the information was used.
- The defendant bears a burden of production to rebut the inference by showing the trade was not motivated by the inside information (e.g., a genuine preexisting plan or other independent reason).
- The court reversed the summary judgments and remanded, concluding a jury could reasonably infer use and, as to 1992, tipping and trading on inside information.

## Legal Principles

- Insider-trading liability under Exchange Act § 10(b) and Rule 10b-5 requires proof that material nonpublic information was used in making the trade; knowing possession alone does not establish liability.
- Proof that a person traded while knowingly possessing material nonpublic information creates a strong inference of use; the inference is rebuttable.
- The inference shifts only a burden of production to the defendant, not the SEC’s ultimate burden of persuasion.
- Evidence of a bona fide preexisting trading plan may rebut the inference of use, but disputes about the plan’s timing and genuineness generally present fact questions.
- Close temporal proximity between acquisition of inside information, communications between insiders, and prompt trading can support inferences of tipping and trading that are ordinarily for the fact-finder.

## Conclusion

The Eleventh Circuit held that insider-trading liability requires “use” of material nonpublic information, but allowed the SEC to rely on a strong rebuttable inference of use from knowing possession, reversing summary judgment because the competing inferences on both the 1989 and 1992 trades required jury resolution.


Sec. & Exch. Comm’n v. Adler, 137 F.3d 1325 (11th Cir. 1998)