Three More Thoughts about United States v. Newman

In the wake of the Second Circuit’s huge remote tippee insider trading decision from two weeks ago in United States v. Newman, three more things occur to me.  To recap, the court held that to be liable for insider trading in a tipper/tippee context, (1) a tippee must know about the personal benefit received by the tipper for the information, and (2) while the personal benefit need not be immediately pecuniary, it must be “of some consequence” and mere friendship is not enough to qualify.  This is a big deal.  But here’s what I think: First, the knowledge element could make things very difficult for the SEC and the Justice Department in remote tippee cases.  The defendants in Newman, for example, were far removed from the original sources of the information.  As the court put it:

[T]he Government presented absolutely no testimony or any other evidence that Newman and Chiasson knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures, or even that Newman and Chiasson consciously avoided learning of these facts.

One of the things that enterprising inside traders might do as a result is to create some distance between the sources of material, nonpublic information and those who ultimately trade on that information.  A person or two in between could mean that the actual traders never know the personal benefit, if any, that accrues to the original tipper.  Structuring insider trading chains in this way could become part of the general business model.  I mean, this is what people do.  The court does seem to allow for liability, as it probably must, if defendants “consciously avoid[] learning of these facts.” 

But one thing about conscious avoidance – it can be pretty hard to prove!  Not impossible, but hard. Second, while most insider trading cases are brought within the Second Circuit, not all are. This one from 2012, for example, was a remote tippee case filed in Charlotte, within the Fourth Circuit.  Which is just to say that if the Justice Department and SEC aren’t scared away by Newman, these issues could come up in another court of appeals and possibly cause a circuit split, allowing the Supreme Court to resolve them once and for all.  The Supreme Court could get to this point anyway, but as of this writing, the government hasn’t decided whether to appeal Newman directly. 

Given Justice Scalia’s recent challenge to the SEC’s interpretive authority, that resolution might not be a happy one for the government. Finally, the SEC has long resisted a statute that would spell out in plain terms what insider trading is and isn’t, preferring instead to rely largely on the general antifraud provisions and letting the courts fill in the gaps.  I wonder if Newman, especially if it’s affirmed by the Supreme Court, would spur the SEC to lobby for a legislative fix to this case.  Such an effort might not be successful.  But insider traders – at least when labeled that way – don’t exactly have a strong lobbying force.  It seems like it would be hard to sell the idea that hedge funds should be entitled by statute to trade on material, nonpublic information as long as they’re several steps removed from the source.  I get that there are nuances here.  I’m just not sure how it plays in the legislative process, which is messy and can obscure that nuance. P.S. I wrote most of this before I read this excellent piece by James Stewart about a possible insider trading statute. It’s really good; you should read it.