SEC v. Adler

United States Court of Appeals for the Eleventh Circuit · 1998 · Corporations

137 F.3d 1325 (1998)

Updated August 22, 2026

CorporationsInsider tradingSecurities fraudSection 10(b)Rule 10b-5Section 17(a)material nonpublic informationscienter

Facts

Pegram, a Comptronix director in 1989, attended a board meeting where nonpublic information about a likely major loss of business from Conners was discussed, and shortly afterward sold 20,000 shares before a public announcement that caused the stock price to drop. Pegram claimed the sale followed a preexisting plan tied to the expiration of a lock-up period and his desire to raise money for his son's business. In 1992, Adler, a Comptronix director, learned at board meetings of potential and then extensive accounting fraud at Comptronix; immediately after a brief call between Adler and Pegram, Pegram's wife ordered a sale of Comptronix stock, and Pegram and his wife sold 150,000 shares before Comptronix's public disclosure. The SEC also relied on closely timed calls and subsequent trades by Choy and Ishler to argue that Adler tipped Pegram and that Pegram or Adler tipped the others.

Issue

Does insider trading liability under Section 10(b), Rule 10b-5, and Section 17(a) require proof that the trader used material nonpublic information, or is knowing possession of such information at the time of trading alone sufficient? Also, under that standard, was the SEC's evidence sufficient to create jury issues as to the 1989 and 1992 transactions?

Rule

Mere knowing possession of material nonpublic information while trading is not a per se violation of Section 10(b), Rule 10b-5, or Section 17(a). Instead, the SEC must prove use of the material nonpublic information in the trade, but proof that an insider traded while in possession of such information gives rise to a strong inference of use, which the insider may attempt to rebut with evidence showing no causal connection between the information and the trade.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nina Torres, a director of Blue Mesa Devices in Phoenix, learns at a confidential board meeting that a key product recall will likely cut quarterly earnings. The next morning, she sells 8,000 shares. Nina admits she knew the information was nonpublic but argues there is no liability unless the government proves the information was the only reason she sold.

Under the governing rule, which is the best statement of Nina’s potential liability?

Explanation. The majority adopted a use test, not a pure possession test. Mere knowing possession is not itself a per se violation, but trading while in possession of material nonpublic information gives rise to a strong inference of use. The trader may rebut that inference with evidence showing no causal connection between the information and the trade.