Monday, March 30, 2015

Congressman Proposes to Make Insider Trading a Federal Crime

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

Insider trading would be classified as a federal crime under a new legislative proposal introduced by Rep. Jim Himes (D-Conn). The bill, drafted under the working title The Insider Trading Prohibition Act, would establish an explicit statutory ban on insider trading, relieving the SEC and Department of Justice of the need to rely on anti-fraud statutes and case law to prosecute these cases.

Bill’s provisions. The legislation proposes to make it unlawful for a person to trade on material, nonpublic information when the information was wrongfully obtained, or when the use of that information to make a trade would be deemed wrongful. It also would make it unlawful for a person who wrongfully obtains material, nonpublic information to communicate that tip to another person when it is reasonably foreseeable that the person is likely to trade on the information.

Himes’ bill defines “wrongful” as information that has been obtained through “theft, bribery, misrepresentation or espionage, a violation of any federal law protecting computer data or the intellectual property or privacy of computer users, conversion, misappropriation or other unauthorized and deceptive taking of such information, or a breach of any fiduciary duty or any other personal or other relationship of trust and confidence.”

Case law. Himes noted in a press release that the development of the law over time on a case-by-case basis has resulted in legal standards that have become ambiguous. In U.S. v. Newman, for example, the Second Circuit Court of Appeals reversed the 2013 insider trading convictions of two hedge fund managers who traded on inside information because the government could not prove that the information was passed along by someone who received a personal benefit for doing so.

Himes proposes to remove the requirement outlined in Newman that a person who receives a tip (a tippee) and trades on that information have any knowledge that the tipper received a personal benefit, as long as the tippee was aware, or recklessly disregarded, that the information was wrongfully obtained or communicated.

The legislation also authorizes the SEC to exempt any person or transaction from liability under the bill at the agency’s discretion. The bill is co-sponsored by Reps. Steve Womack (R-Ark), Carolyn Maloney (D-NY) and Emanuel Cleaver (D-Mo).

Columbia Law School Professor John Coffee, Jr. applauded the proposed legislation, noting that it closes the Newman loophole and updates the law to cover computer hacking and other newer forms of misappropriation.

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