Securities & Exchange Commission v. Brewer

Background

The Securities and Exchange Commission (SEC) brought an enforcement action against Jack Brewer, alleging violations of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and related regulations. The SEC moved for partial summary judgment on its claim that Brewer violated Section 10(b) of the Exchange Act and Securities and Exchange Commission Rule 10b-5 through insider trading. The motion did not address the SEC’s claims concerning Section 15(a) of the Exchange Act or aiding and abetting violations of Section 204A of the Investment Advisers Act and Rule 204A-1.

Brewer had worked as a professional football player and later became a licensed securities professional and investment adviser. He owned The Brewer Group, Inc., and served as its chief executive officer and portfolio manager. One of the group’s affiliated companies, Brewer & Associates Consulting, LLC, entered into agreements with Copsync Inc., a publicly traded company, to provide business-development and marketing services. Brewer also entered into a personal endorsement agreement with Copsync.

Those agreements included confidentiality provisions. Brewer also received Brewer Capital’s written supervisory procedures, which prohibited securities transactions while possessing material, nonpublic information and instructed him to consult the company’s chief compliance officer if he was unsure whether trading was lawful.

The confidential information and trades

Copsync faced financial losses, needed to raise capital, and faced possible suspension or delisting from NASDAQ. In December 2016, Copsync sent Brewer confidential documents about a proposed securities offering. The documents described an offering of up to two million units consisting of common stock and warrants, with a maximum unit price below the contemporaneous market price. The court found that the information indicated Copsync was unlikely to raise enough money through the offering to satisfy its NASDAQ-related requirements. Brewer also learned that the offering could reduce the company’s stock price.

On January 4, 2017, Brewer instructed the chief compliance officer and chief operating officer to facilitate the sale of 5,000 Copsync shares. He then changed the order to sell the remaining 95,000 shares. Brewer sold the shares on January 4 and 5 for total proceeds of approximately $104,178. Copsync publicly announced the offering on January 6. Its stock price fell 32.5% that day. The court noted that Brewer would have received approximately $35,178 less had he sold the shares after the announcement at the later closing price.

The court also noted that Brewer did not tell his broker that he possessed material, nonpublic information and did not disclose to the other people involved in the trades that he might have such information.

Summary-judgment standard and undisputed facts

Summary judgment is appropriate when the record shows no genuine dispute about a fact that could affect the outcome and the moving party is entitled to judgment under the law. Brewer did not submit a correspondingly numbered response to the SEC’s statement of material facts as required by the court’s local rules. The court therefore deemed the SEC’s numbered factual assertions admitted for purposes of the motion, while noting disagreements where appropriate.

Insider-trading theories

The court explained that insider trading may be established under two theories. Under the classical theory, a corporate insider may not trade using material, nonpublic information in violation of a duty owed to shareholders. Under the misappropriation theory, a person who receives confidential information from its source may not use that information for personal profit in violation of a duty owed to the source.

The court held that the undisputed facts established the required elements under both theories. It found that Brewer possessed material, nonpublic information about Copsync’s offering. A reasonable investor would consider the likely failure to raise enough money to meet NASDAQ requirements, the resulting risk of delisting, and the offering’s discounted terms important to an investment decision. The information was nonpublic because Copsync gave it to Brewer confidentially and had not broadly distributed it to the investing public.

Duty of confidentiality

The court held that Brewer owed duties of confidentiality under both theories. Under the classical theory, Brewer was a “temporary insider” because he served as a consultant and received access to Copsync’s confidential information for corporate purposes. Under the misappropriation theory, the confidentiality provisions in the Advisory Agreement, Expansion Agreement, Endorsement Agreement, and Securities Purchase Agreement created duties of trust and confidence.

Breach and scienter

The court held that Brewer breached those duties by selling his Copsync shares while possessing the confidential offering information and without disclosing that he would trade on it. The court also found no genuine dispute that Brewer acted with scienter, meaning the mental state required for a securities-fraud violation. At minimum, the court found that Brewer acted recklessly. It relied on his securities-industry experience, his understanding of material and nonpublic information, his compliance training, the confidentiality provisions he signed, and his knowledge that the offering information could negatively affect Copsync’s stock price.

The court rejected Brewer’s argument that the process allowing him to remove the restricted legend from his shares showed that he could lawfully trade them. The court explained that this process addressed a different securities-law requirement and did not determine whether Brewer possessed material, nonpublic information. The process was also completed before Brewer received the offering information.

Disposition

The court granted the SEC’s motion for partial summary judgment on its claim that Brewer violated Section 10(b) of the Exchange Act and Rule 10b-5. The opinion did not rule on the SEC’s other claims for which the SEC had not sought summary judgment. The parties were ordered to submit a joint letter proposing next steps by June 9, 2025.