US v. Newman

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U.S. District Judge Jed Rakoff denied motions for judgment as a matter of law or for a new trial after a jury found the defendants civilly liable for insider trading. The decision in SEC v. Payton (S.D.N.Y. Nov. 29, 2016) held that the jury had sufficient evidence to conclude that the initial tipper of inside information had misappropriated it and passed it on in breach of a duty of confidence and in exchange for a personal benefit – and that the defendant remote tippees had consciously avoided learning of the tipper’s breach of duty.

A handful of recent SEC defeats in administrative proceedings have caused us to question the conventional narrative that the SEC has a distinct “home field advantage” before its own administrative law judges.  According to analysis conducted by the Wall Street Journal, the SEC had a 90% win rate in contested cases it brought before its ALJs from October 2010 through March 2015, while it prevailed in only 69% of federal court trials over the same period.  After the SEC lost five high-profile insider trading trials in 2014, this narrative seemed to fit.

The U.S. Court of Appeals for the First Circuit held yesterday that friends’ gifts of wine, steak dinners, and other luxury items can constitute the types of personal benefit needed to establish a breach of duty in connection with a prosecution for insider trading. The court’s May 26, 2016 decision in United States v. Parigian also suggested, but did not expressly hold, that the state of mind required for criminal insider trading is the same as in other types of criminal cases – and that a “knew or should have known” standard should not suffice for liability.

Last week, representatives of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) participated in Sandpiper Partners LLC’s Annual SEC/DOJ Enforcement 2016 Panel at the Metropolitan Club. Participants included: Stephanie Avakian (Deputy Director, Division of Enforcement, SEC), Nicole Friedlander (Chief, Complex Frauds and Cybercrime Unit, U.S. Attorney’s Office, Southern District of New York), and Telemachus Kasulis (Deputy Chief, Securities and Commodities Task Force, U.S. Attorney’s Office, Southern District of New York).

The Second Circuit last week affirmed the conviction of a former corporate executive on charges of insider trading.  The court’s unpublished decision on January 14 in United States v. Riley held that the Government had adduced sufficient evidence that the defendant had received a personal benefit – in the form of investment advice – in exchange for providing material nonpublic information to a tippee.

The Supreme Court today refused to grant review of the Second Circuit’s restrictive insider-trading decision in United States v. Newman.  The Government, through the Solicitor General, had asked the Supreme Court to clarify the nature of the “personal benefit” that a tipper must receive in order to create liability for insider trading.  But the Supreme Court declined to take the case.

After months of will-he-or-won’t-he speculation about whether the U.S. Solicitor General would ask the Supreme Court to review the Second Circuit’s restrictive insider-trading decision in United States v. Newman, the question has now been answered. The Government filed a certiorari petition on July 30, 2015 asking the Supreme Court to clarify the nature of the “personal benefit” that a tipper must receive in order to create liability for insider trading – and to resolve what the Government characterizes as a split between the Second Circuit and other appellate courts, including the Ninth Circuit in its recent decision in United States v. Salman.

The U.S. Court of Appeals for the Ninth Circuit appears to have rebuffed aspects of the Second Circuit’s recent effort to narrow liability for insider trading. The Ninth Circuit’s decision today in United States v. Salman holds that insiders can engage in insider trading if they disclose material nonpublic information with the intent to benefit a trading relative or friend, even if they do not receive a pecuniary gain or other quid pro quo type of benefit in exchange for the disclosures.

The Ninth Circuit’s opinion was written by Judge Jed Rakoff, a Senior District Judge for the Southern District of New York, who sat by designation on the Ninth Circuit panel – and whose recent opinions seem to have struggled with the Second Circuit’s decision in United States v. Newman. The Ninth Circuit’s decision might now create a circuit split – and enhance the chances that the Government will seek and perhaps obtain a writ of certiorari from the Supreme Court in Newman and/or Salman.