Government Loses Insider Trading Case
Commentary by Steven Lofchie
An administrative law judge dismissed an insider trading case brought by the SEC against a trader at an investment bank. The case examined the personal benefit prong of the "misappropriation theory". The inside information was provided by a research analyst at the bank and concerned an imminent change in the rating of a security.
Administrative Law Judge Jason S. Patil concluded that the SEC Division of Enforcement failed to meet its burden of proof in attempting to show that the insider tip was offered in exchange for a personal benefit and that, given the absence of proof of personal benefit, the requirements of the "misappropriation theory" were not met.
Commentary
The fact that the government lost an insider trading case is likely to renew its legal focus on the Newman case (United States of America v. Newman (and Chiasson), 773 F.3d 438 (2d Cir. 2014)), in which the Department of Justice failed to demonstrate that traders who arguably had received inside information and traded on it were guilty of a crime. As in the present case, one element of the defense in Newman was the lack of any material benefit received by the tipper for the tip. However, the Newman defense had another significant prong – one that made it wholly inappropriate for the DOJ to bring the case to trial: the Newman defendants had no reason to believe that they had received information improperly. It would have been absurd for the Newman defendants to be convicted of acting on the basis of information to which they reasonably believed they were entitled. In the present case, however, the SEC might have been able to prove that the trader was aware he had received information improperly. If that is true, then a reasonable argument can be made that the trader violated SEC Rule 10b-5, even if the person who provided the information improperly did not receive a benefit.