More than 10 years ago, the Securities and Exchange Commission (SEC) enacted Rule 10b5-1 as an attempt to resolve questions about the requisite knowledge necessary to impose liability for insider trading offenses. Yet, rather than providing clarity in insider trading cases, the precise role of “knowledge” in these cases has remained obscure, for although the SEC rule purported to create a relatively simple formula for imposing liability on defendants under which anyone “aware” of material nonpublic information can be found guilty of trading on the basis of that information, regardless of whether any evidence exists that their possession of this information was the motivation for those trades commentators have long argued that the SEC exceeded its rulemaking authority by enacting it.
Furthermore, in recent cases, courts in both civil and criminal actions have proved hesitant to impose liability so broadly. Thus, there remains significant room for defense counsel in insider trading cases to continue to advocate against the application of Rule 10b5-1′s knowledge standard, and require the SEC and the Department of Justice (DOJ) to prove that the material nonpublic information in question was actually used.
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