Occupy the SEC (“OSEC”) has submitted an amicus brief to the United States Supreme Court, recommending that the court adopt an expansive view of insider trading liability.
Many members of the public presume that anyone who trades on material, non-public information has committed the crime of “insider trading.” That presumption is wrong.
For decades, courts have reiterated that insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 also requires a breach of fiduciary duty by the insider. The issue of the insider’s breach of trust has plagued the courts over the years, and the Supreme Court once again faces the issue in Salman v. United States.
In Salman, the Court will decide when someone who receives inside information (“tippee”) deriving from an insider is actually liable for trading on that information. Under long-standing precedent, a tippee is liable only if the insider has breached a fiduciary duty by disclosing the information. This term, the Supreme Court will decide whether a gift of inside information can qualify as a fiduciary breach.
In 2015, the Second Circuit Court addressed the same issue in United States v. Newman, and decided in favor of the hedge fund defendants in that case, dealing a significant blow to federal prosecutors like U.S. Attorney Preet Bharara. The spate of insider trading convictions since the Great Recession of 2008 (and before) is testament to the fact that the securities markets are rigged in favor of the well-connected and the influential.
Occupy the SEC has submitted an amicus brief to the Supreme Court in Salman, arguing that gratuitous tips of inside information should also serve as the basis for insider trading convictions. Otherwise, the friends and families of company insiders will be free to profit from secret company information, without liability. Retail investors, pensioners and other non-insiders cannot fairly compete in the securities markets under such conditions.
Oral arguments for Salman are scheduled for October 5, 2016.