DOJ Asks Supreme Court to Clarify Insider Trading Liability
08/11/2015Last year the federal appeals court in New York upended DOJ’s insider trading prosecutions, holding that the “gifting” of insider information was only illegal where the tipper received something objective and at least potentially pecuniary in return for the tip. Although many have praised the Second Circuit’s decision for significantly raising the bar for insider trading prosecutions—generally requiring proof of some quid pro quo—the Newman opinion also injected ambiguities and amorphous standards into the analysis that give little practical guidance to the bar, the courts and the marketplace.
The Justice Department’s displeasure with the Newman holding was well known, and it has now predictably filed a cert petition with the Supreme Court, complaining that the decision conflicts with Supreme Court precedent and with decisions in other circuits. DOJ focuses much of its argument on a decades-old Supreme Court case that seemed to allow insider trading culpability even in the absence of an “exchange” of something of value. What really bothers federal prosecutors is that proving a quid pro quo is difficult and, in some cases, impossible, even though the evidence on the insider tip may be strong. In any event the Newman rule now controls most insider trading cases since the majority of those cases are prosecuted in the Southern District of New York, part of the Second Circuit. Because of the controversy surrounding the decision, most legal observers predict the Supreme Court will accept the petition and hear the case this coming term.