White-Collar Crime

The Second Circuit Slaps Down Preet Bharara's Insider Trading Prosecutions

Are there really so few people committing crimes in Manhattan that they have to prosecute people who are committing maybe crimes?

By  
on

Yesterday, the Second Circuit clarified what counts as insider trading.

It turns out that the folks at the U.S. Attorney’s Office at SDNY had been trying to put people in prison who hadn’t actually committed a crime. Oops.

As I wrote about before, United States v. Newman was closely watched by the white-collar bar. It dealt with the question of whether in an insider trading case, someone trading on a tip had to know that the person giving the tip was getting something of value for that tip.

This was an open question of law. But the U.S. Attorney’s Office went ahead and prosecuted people on that theory anyway.

As the Second Circuit said:

The Government’s overreliance on our prior dicta merely highlights the doctrinal novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders. By contrast, our prior cases generally involved tippees who directly participated in the tipper’s breach (and therefore had knowledge of the tipper’s disclosure for personal benefit) or tippees who were explicitly apprised of the tipper’s gain by an intermediary tippee…We note that the Government has not cited, nor have we found, a single case in which tippees as remote as Newman and Chiasson have been held criminally liable for insider trading.

In that void of law — that area of “doctrinal novelty” — the U.S. Attorney’s Office in SDNY decided that prosecuting things that may not be illegal is a good way to spend government resources.

Sponsored

Are there really so few people committing crimes in Manhattan that they have to prosecute people who are committing maybe crimes?

And Newman isn’t the only case. Scalia recently expressed concern about the Second Circuit’s deference to an SEC rule in insider trading cases, making the Second Circuit the only circuit that allows an insider trading conviction for only having inside information, not for trading on it.

The SEC has, of course, civil enforcement authority. Whether folks like Newman could be responsible for insider trading violations had not been dealt with in the development of the law in civil cases. Instead, the government sunk the vast and coercive power of the criminal justice system into clarifying the law.

The problem with using criminal prosecutions to clarify ambiguous laws that can be applied criminally or civilly highlights one of the really lousy things about the criminal justice system.

In a civil case, most cases are resolved in three ways — through a motion to dismiss, through summary judgment, or through settlement. Sure, some stuff goes to trial, but trial is rare in a civil case. There are civil litigators who spend their whole careers without a trial.

Sponsored

As all of us learned in law school, in a motion to dismiss or a summary judgment motion, there is substantial litigation over what the law is. A party can argue over the contours of cases or statutes and whether the allegations in this case meet those allegations.

In large part, that’s because there is significant factual development of the case before trial. There is a lengthy discovery process that both sides participate in.

In a criminal case, by contrast, most cases are resolved through a plea — a very precious view are dismissed pretrial.

In a criminal case the factual development is presumptively done at trial. The discovery process is much more cursory and there are few depositions, if any (there’s a rule — Rule 15 of the Federal Rules of Criminal Procedure — but it’s narrower than civil rules allowing depositions).

As a result, the first meaningful chance a person charged with a crime has to challenge the law — to say that “hey, this isn’t insider trading,” for example — is when the government rests its case at the end of trial.

Imagine all of your Rule 12 or summary judgment briefing crammed into the middle of a trial. Often it isn’t even done through written motions practice. That’s how our federal criminal law is developed.

A person who is charged with something that is only maybe a crime — or, as in Mr. Newman’s case, not a crime — has to go through half a trial before he’s told whether what the government has accused him of is actually a crime.

And in Mr. Newman’s case it’s even more harsh — the guy was convicted and sentenced. Since his trial — again, for something that was, at the time, only maybe a crime and is now not a crime — he’s been living under the cloud of a federal felony conviction and a prison sentence.

All of this happens when there’s another perfectly viable vehicle for developing insider trading law — through enforcement actions from the SEC.

So, again, isn’t there enough actual crime in Manhattan to prosecute? Or will that not get the U.S. Attorney on the cover of Time and speaking at Harvard?

Matt Kaiser is a white-collar defense attorney at Kaiser, LeGrand & Dillon PLLC. He’s represented stockbrokers, tax preparers, doctors, drug dealers, and political appointees in federal investigations and indicted cases. Most of his clients come to the government’s attention because of some kind of misunderstanding. Matt writes the Federal Criminal Appeals Blog and has put together a webpage that’s meant to be the WebMD of federal criminal defense. His twitter handle is @mattkaiser. His email is [email protected] He’d love to hear from you if you’re inclined to say something nice.

Topics

, , ,