Insider Trading: Overreach, Underreach and Reform

It has been nearly 60 years since the SEC first clearly prohibited insider trading in its 1961 decision in In re Cady, Roberts & Co. You would think that would be long enough for the doctrinal rules to have become reasonably clear. Think again! The recent evidence shows otherwise: A month ago, U.S. District Judge Paul Gardephe for the Southern District of New York permitted a defendant who had plead guilty to insider trading charges in 2013 to withdraw his guilty plea because there had been “insufficient” evidence that a personal benefit had been paid by the tippee to the tipper. See United States v. Lee, 13-Cr.-00539 (PGG). Lee shows the continuing impact of United States v. Newman, 773 F.3d 438 (2d Cir. 2014). Newman had been limited by the Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016) and seemingly laid to rest earlier this year by the Second Circuit’s decision in Gupta v. United States, 913 F.3d 81 (2d Cir. 2019). Nonetheless, Newman retains enough residual vitality to necessitate a new trial for Richard Lee, a former trader at now defunct SAC Capital. Pundits are predicting that the case will discourage the Government from bringing cases involving remote tippees.

Perhaps. No doubt prosecutors have been perplexed by a number of new decisions (which may or may not apply in other Circuits). They are today reacting in a predictable way that may sow even greater confusion by turning to alternative statutes. Congress also may be responding with new legislation—the Himes Bill (H.R. 2534), which recently unanimously passed the House Financial Services Committee. Still, prosecutors do not have time to wait to see what happens to the Himes Bill if it reaches the Senate (where good legislation often goes to die). Given the ambiguities surrounding what constitutes a “personal benefit” and when it must be shown, prosecutors have begun to explore other existing statutes that can also reach insider trading. These include:

(1) The mail and wire fraud statutes (which were used in Carpenter v. United States, 484 U.S. 19 (1987));

(2) The STOCK Act (Stop Trading on Congressional Knowledge); and, most importantly,

(3) 18 U.S.C. §1348 (a provision added in 2002, as part of the Sarbanes-Oxley Act).