(CN) - A federal judge rejected insider trading claims against an Atlanta man, finding the allegations stemmed from an "overreaching" and "self-serving" interpretation of circumstantial evidence.
The U.S. Securities and Exchange Commission sued Ladislav Schvacho in July 2012, claiming that the retired engineer made $511,667 investing in Comsys IT Partners, a staffing firm, based on nonpublic knowledge that Manpower Inc. was about to acquire it.
This information, the agency said, came from Larry Enterline, then-CEO of Comsys IT, who was Schvacho's long-time personal friend and business associate.
The SEC based its case of extensive evidence of contact between the two men from November 2009 to Feb. 2, 2010, the date on which Comsys IT publicly announced that the Manpower acquisition.
In addition to phone records showing that the two men spole several times a week, and in some instances, multiple times a day, investigators also showed that they took together moved a sailboat from St. Petersburg to Fort Myers, Fla., that they took a lengthy drive from Florida back to Atlanta, Ga., and that they had dinner at restaurant in Buford.
Niether of the parties disputed that the dinner and the boat trip occurred when acquisition talks between Comsys and Manpower were at a critical stage.
Schvacho allegedly bought large blocks of Comsys stock after each of these events.
But for all the evidence the SEC offered showing contact between the two men, U.S. District Judge William Duffy found Tuesday that the agency utterly failed to offer any evidence Enterline and Schvacho ever once discussed the merger.
Even in its complaint, the SEC acknowledged in every instance that "the content of the call is unknown," according to the ruling.
Further, while the agency could provide many details about the sailboat trip and the dinner, including the identity of others who were present, it offered no testimony proving any inappropriate exchanges of information had taken place, Duffy said.
The Atlanta-based judge also took note of the "credible and believable" testimony that Enterline, "a business professional with an unblemished history of leadership in the private sector," gave at a bench trial last November.
"Enterline was well-versed in Comsys' policy prohibiting and guarding against the disclosure of inside information," the opinion states. "He knew disclosure of inside information had criminal consequences. ... To accept the SEC's interpretations of the circumstantial evidence upon which the SEC relies, the court would have to believe that Enterline, over a period of years, intentionally or carelessly passed along sensitive, private and confidential inside information to Schvacho without regard to the serious consequences that would follow if he did."
Taking in account both Schvacho and Enterline's testimony, the record shows that Schvacho came into a large amount of money at his retirement and that he saw the investing of that money as a potentially lucrative second career, the court found.
While Schvacho chose to invest in the staffing industry and Comsys in particular because he knew Enterline and had confidence in his management of the company, there is no evidence he never revealed his investments to his longtime friend, Duffy said. In fact, since Enterline learned of the investments from investigators, the two men have been estranged, according to the ruling.
"Enterline was concerned about the appearance of impropriety associated with Schvacho's trades and his personal reputation as the CEO of a public company," Duffy wrote.
Ultimately, the SEC's evidence is too thin to suggest Enterline ever intentionally provided inside information about Comsys to Schvacho.
"The court finds that Enterline did not intentionally provide Schvacho with inside information regarding the acquisition of Comsys by Manpower or any other Comsys confidential information and took steps to assure that he did not discuss Comsys business, and especially Comsys's discussions with Manpower, in Schvacho's or another person's presence," Duffy wrote.
Schvacho's attorney, Ross Albert, a partner with Morris, Manning & Martin, said the case should never have gone to court.
"We pointed out to the SEC these very same problems with its version of the facts multiple times, long before the case was even filed," Albert said in a statement. "The judge repeatedly noted the obvious gaps and contradictions in the SEC's theory of the case, and specifically found that both the testimony of Mr. Schvacho and Larry Enterline, the alleged source of inside information, was credible."
Schvacho said Duffy's ruling "amounts to a total vindication."
"I am grateful that Judge Duffy took the time to carefully sift through the evidence and to categorically reject the SEC's unfounded and false allegations," he said in a statement.
The SEC did not immediately return a phone call seeking comment.
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