DOJ’s New Approach to Insider Trading Cases? It’s Not Working Yet

Win red dicePeter J. Henning, in the always-interesting White Collar Watch, has a great article today about what may be the Department of Justice’s newest way to weasel out of the Newman decision.

The defendant in an insider trading case in Atlanta was just acquitted at trial of all insider trading charges. Steven Slawson, a New Jersey hedge fund manager, was accused of using insider tips to trade in stock in Carter’s. Two former Carter’s executives had been convicted of insider trading in a related case.

DOJ relied on what may be its newest approach to charge defendants with insider trading.

The White Collar Watch article explains that DOJ relied on a new(ish) statute to charge Mr. Slawson with insider trading. Rather than relying on Section 10(b) of the Exchange Act of 1934, DOJ charged him with violating 18 U.S.C. § 1348. That section reads:

Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or

(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d));

shall be fined under this title, or imprisoned not more than 25 years, or both.

This statute, according to the government, may help them avoid the remote tippee problem in Newman because they do not have to prove the tippee’s knowledge of a benefit  to the tipper.

The White Collar Watch article explains more:

It is not clear how much this new law [section 1348] differs from Section 10(b) because both require proof of some type of fraud. Mr. Slawson asked the trial court to dismiss the securities fraud charges because prosecutors had not identified in the indictment his knowledge of the benefit provided to the tipper.

The government argued in response that the law was intended “to enable prosecutors to reach a greater array of securities-related misconduct, and to enable the government to avoid the technical complexities and nuances of the traditional securities laws that were often exploited by defendants and their lawyers.” In other words, the benefit requirement imposed by the Supreme Court in the Dirks case no longer applies because Congress adopted Section 1348 to “avoid” such cumbersome requirements.

The trial court agreed, so the jury instructions made no reference to finding Mr. Slawson’s knowledge that the tipper received a benefit in exchange for the information, or that one was even given to the source. The only requirement was that he knew the person providing the information embezzled it from Carter’s in order to share it with others who would trade. That is a far cry from what the Supreme Court found necessary for tipping liability in the Dirks case.

Even though DOJ won that battle, they lost the war, and Mr. Slawson was acquitted. It remains to be seen when DOJ’s interpretation of section 1348 will be put to the test. On its face, the statute does not require the kind of knowledge that section 10(b) has been found to require. (Damn, I hate to agree with DOJ.)

But–and that’s a big BUT–courts may not appreciate DOJ working around Newman‘s reach by using a new statute that requires fraud just like section 10(b).

I’d like Judge Rakoff to get his hands on this issue. I’m not sure DOJ would prevail on its legal arguments then, although he’s been careful to limit Newman‘s reach

The jury apparently deliberated for just three hours before reaching its verdict. Mr. Slawson’s lawyer, Todd Harrison, put it best:

Congrats to Mr. Slawson!

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