Controversy over the Prohibition of Insider Trading Act
Not long ago, the US House of Representatives passed the Insider Trading Prohibition Act (hereinafter referred to as the “Act” or “ITPA”). Supporters of the bill cheered, hailing it as a bipartisan victory for the Democrats and Republicans. Instead, critics refer to it as the “Insider Trading Protection Act” because it enshrines the “personal interest” standard in statute, that is, the tipper) to give or promise certain benefits (including tangible or intangible reputational benefits), the leaker can only be convicted.
Before the bill was enacted, this standard had resulted in many convictions involving insider trading being overturned, and even more often the perpetrators may not have been charged at all. Therefore, in related cases before the Second Circuit, in order to bring the whistleblower under legal sanctions, prosecutors often turn to other statutes to convict the defendant in a roundabout way, mainly including the wire fraud statute and the United States Code Section 18 Title 1348 (a special securities fraud statute). Prosecutors’ moves appear to have worked, as in Blaszczak v. United States, where the Second Circuit jury did not adopt the self-interest test, but endorsed the prosecutor’s view even though the parties did not benefit from the leak Profits can also constitute a crime, in other words, the jury did not consider personal gain as a necessary precondition for wire fraud or a Section 1348 conviction. While the Supreme Court’s subsequent reversal decision meant that the authority of the Blaszczak case did not last, it did reflect the unanimous position of the 2nd Circuit jury on the issue of “case by case”, which may have implications for other juries .
The passage of the bill, however, means that prosecutors will struggle to continue to resort to other laws to convict perpetrators, and regulations that conflict with the bill’s provisions will need to be reinterpreted. In this way, in insider trading cases, whether all relevant regulations need to uniformly apply the standard of personal interest becomes the crux of the issue.
The scope of application of the personal interest standard is ambiguous
The bill looks like the product of a compromise, hastily drafted by an “unspecified committee”. The question of how key parts of the bill came about and how it would be self-contained remains unanswered. To explain why this article has named the Drafting Committee, the author first lists a key provision that endorses the standard of personal interest, namely that the Act would add a new Section 16A to the Securities Exchange Act of 1934, of which 16A (c) Fundamentally define insider trading by specifically describing various forms of “improper” use of material nonpublic information in violation of the Act. Proposed 16A(c)(1)(D) reiterates the basic criteria of Dirks v. SEC by saying:
(D) breach of any fiduciary duty, nondisclosure agreement, contractual covenant, code of conduct, ethics policy, or breach of Any other relationship of trust and trust for direct or indirect personal benefit (including monetary benefit, reputational benefit or giving away confidential information to relatives or friends involved in the transaction).
The question then arises, does “for direct or indirect personal benefit” modify only the second half of the sentence “in breach of any other relationship of trust and trust”, or does it modify all of the violations listed in (D)? When the perpetrator violates the contractual agreement, code of conduct or moral policy, but does not violate the fiduciary obligation, does it need to be “for the purpose of obtaining direct or indirect personal interests” to be identified as insider trading? The statement here is rather vague, so let’s assume that (which is probably what the rules are intended to be) before moving on to other discussions.
However, does (D) also subject the circumstances specified in (A), (B) or (C) of the preceding paragraph to (D) the personal interest standard? For example, (C) provides for “conversion, misappropriation, and other acts of obtaining or defrauding such information without authorization,” and (A) provides for “theft, bribery, etc.” , misrepresentation or espionage…” The act of obtaining information. Now, suppose that in a case, the prosecutor believes that there is both a breach of a fiduciary relationship and a theft in (A) or an “embezzlement” or “misappropriation” of unauthorized access or fraudulent information in (C). At this point, can the prosecutor ignore the personal interest criterion and directly determine that it constitutes insider trading only on the basis of the existence of “theft”, “misappropriation” or “misappropriation”? In short, can prosecutors convict without finding any facts of personal gain? The traditional interpretation says yes, because the provisions in (D) cannot logically limit (A) or (C). This is precisely the question of whether the self-interest standard in the cassation order just approved by the U.S. Supreme Court (before the Blaszczak case was dismissed) can be uniformly applied.
This conventional explanation may apply to rather extreme cases. Let’s take two examples. In the first example, in business class on an international flight, an investment banker got up to go to the bathroom while the person sitting next to him read the memo he left on the tray table. The person next door then uses this information to trade and profit. Is this “deceptively” obtained or misappropriated? Suppose the investment banker puts the memo back in a thick unlocked folder or briefcase before going to the bathroom, but for some reason the person next door opens the briefcase and reads the memo. The person next door at this point is more in line with the “unauthorized” and “deceptive” situation of obtaining information, but the investment banker has no personal benefit from it, even if he constitutes a crime, compared to the situation where the information is exchanged for money , the crime is much lighter.
As a second example, suppose I met a partner attorney in a Manhattan elevator and overheard the “big mouth” on the phone revealing important non-public information that few could understand. , but I happen to be an experienced M&A lawyer and I can understand the information and then I use it to make a deal. The situation in this example might be considered a “misappropriation” or “misappropriation”, but could it be considered “deception” and “unauthorized”? If my actions were deemed “deceitful” and “unauthorized,” I should have some legally required disclosure obligation to publicly state that I understood what the “big mouth” was saying (but under current law I don’t no such obligation). Regardless of the above, at least in this instance there is no personal benefit given or promised.
How should these different situations be handled? Logically, (C) requires the perpetrator to “embezzle,” “misappropriate,” or otherwise “acquire,” but does not require the person to be disclosed to pay any personal benefit to the person who disclosed it. Based on what the “big mouth” said in the elevator, or traded on information that investment bankers had under their noses, such conduct may not be considered a crime (at least under Rule 10b-5) because it is only based on the perpetrator’s It is not enough to demand criminal responsibility for moral defects.
Possible handling attitudes in judicial practice
But the risk is real that courts may interpret the personal interest test in (D) to apply to (C) and (A) as well. Because everything under the insider trading law so far has been made up of judges’ precedents, ITPA will be the first time Congress has explicitly stipulated insider trading law in the form of a bill. Terms such as “misappropriation” and “misappropriation” in this section cover a wide range, and due to concerns about the abuse of criminal liability, the Supreme Court may interpret (A) and (C) as the same subject as (D) (i.e. all apply the personal interest standard), thereby limiting the scope of criminal strikes. After all, the self-interest standard is a core element of Dirks, which was the original origin of modern insider trading law. And, if Congress hadn’t assumed that similar standards apply to (A) and (C), it wouldn’t have made (D) so specific. From a policy perspective, the standard of guilt for cases with fiduciary relationships should not be higher than for cases without fiduciary relationships. It is precisely because of the existence of the fiduciary relationship that the information leakage behavior of the trustee should be negatively evaluated, and should not be specially protected by the standard of personal interests.
At the same time, the court may also argue that the common law on insider trading should be judicially applied in the same manner as expressly provided for in (D) more than three decades after Dirks. In other words, a court may be allowed to interpret Congress’ intent when Congress does not expressly provide it, but when Congress does so, the court must abide by it.
Another argument is the void for vagueness doctrine, according to which (A) and (C) should be narrowed down to (D) when semantics are in doubt. In Skilling v. United States, Justice Ginsburg applied the invalidity doctrine of vague clauses to abridge the wire fraud statute (in part to avoid invalidation of the statute), and she argued that Its ambiguity must be read in harmony with its narrowest rational interpretation. The same can be done with ITPA, which is not as ambiguous as Justice Ginsburg’s reinterpretation of the statute.
Bill urgently needs to be amended
This article is not intended to endorse the narrow interpretation of 16A, nor does it support the interpretation that (A), (B), and (C) should uniformly apply the self-interest standard. The argument of this paper is that it is unreasonable to require a higher and more demanding standard of proof only when there is a fiduciary relationship between the parties, that the misconduct of the fiduciary is more reprehensible in principle than that of other subjects, but even if the rules exist strangely The distinction does not mean that it has been suspected of being unconstitutional. However, even if this article opposes the “uniform application of the personal interest standard”, the court will support it.
From a public policy standpoint, explain why courts should not apply the personal interest test to several others in 16A(c)(1), and why Dirks cannot apply beyond the scope of Rule 10b-5 Clarity is necessary. In 18 U.S.C. 1348 and the current act, Congress has recognized that it is difficult and nearly impossible to bring an insider trading lawsuit unless the parties can demonstrate that a professional trader or institution acquired confidential information for a fee Win the case. The United States v. Newman case is instructive and representative, in which an employee of the company’s public relations department twice disclosed material non-public information to institutional investors in order to appease them. Existing evidence cannot prove that there was money transfer in this case, nor that the information leakage in this case is sufficient to constitute a “gift” in the traditional sense (within the meaning of the Dirks case). The evidence shows that “a group of financial analysts exchanged information they had obtained from insiders of the company” and that the two defendants were in the third and fourth layers of the information transmission chain, “and they earned money for their funds from the transaction. $72 million in profit.”
This shows what? In modern society, institutions and other professionals do not pay for non-public information. Wall Street is a huge “bank of favors”. If you owe a favor, you can pay it back later. Mutual benefit is the norms of reciprocity, leakers don’t have to worry about going for nothing, they will be rewarded in due course. Criminal law requires specific payment evidence to be convicted. The unspoken industry rule formed over the years—the vague expectation of future returns does not meet this evidential standard. Therefore, both Section 1348 and ITPA seek to simplify the law so that prosecutors can bring to justice professional traders who are suspected of insider trading crimes. If only some unreliable arguments are used to reinterpret the original meaning of the law as: “the standard of personal interests should be uniformly applied”, then Article 1348 and the Act will lose their significance, and many criminals will turn into extrajudicial fanatics.
So what to do next? The minor changes in the Act do not mean that the self-interest test is required to apply in all situations set forth in 16A(c)(1). Much of the bill is still desirable, but it is very important to make it clear that the self-interest criterion is narrowed to (D). There were no House hearings this year, and no one pointed out to the House that the Bharara Task Force on Insider Trading had unanimously agreed that the personal interest test should be removed from insider trading laws. Instead, the House simply re-enacted the old bill passed in 2019, compromising hastily at the whistle. For example, an amendment proposed by Congressman Patrick McHenry (RNC) was also included in the bill, which appears to have been included solely to gain Republican support. No one recognizes the wickedness of this compromise, which makes the passed bill look like a mess. Negatives can be positives, but wrongs can only be made worse. All kinds of contradictions are rife in the bill, and Republicans may one day be surprised to find that they have not restored the uniform application of the standard of personal interest; Democrats may be greatly disappointed , because they also failed to remove the self-interest criterion.
It only takes a few word changes to bring clarity to the Act, but without changes, the impact will be unpredictable—not just in the interpretation of that provision of the Act, but in how to interpret the wire fraud statute and the U.S. Section 1348 of the Code.