By Rodney F. Tonkovic, J.D.
The Supreme Court has denied a petition for certiorari asking for clarification of the Second Circuit's standard for determining the existence of a fiduciary relationship in the insider trading context. A doctor convicted of trading on information learned while participating in a drug trial argued that a mere promise to maintain confidentiality does establish a fiduciary relationship. The Second Circuit disagreed, holding that the doctor was a "temporary insider" who breached a duty owed to the source of the confidential information. Since there are currently only two more conference days on the Court's schedule, this order list is one of the last to be issued during this term.
Insider trading. The petitioner, cardiologist Edward Kosinski, served as a principal investigator in a clinical trial conducted by a biopharmaceutical company in 2014. Kosinski signed two agreements in which he agreed to keep trial information confidential. He also agreed to "promptly" disclose to the company if he held over $50,000 in company shares.
Kosinski began purchasing company stock in late 2013 and eventually amassed 40,000 shares worth around $210,000. On June 29, 2014, Kosinski and the other investigators received advance notice that enrollment in the trial was being suspended due to allergic reactions. The next day, Kosinski sold all of his shares. On July 2, 2014, the company publicly announced that enrollment had been suspended. Kosinski avoided a loss of approximately $160,000 by selling before the announcement and subsequent drop in share price. After learning that the trial would likely be permanently halted because a patient had died, Kosinski bought put options that yielded $3,300 after the end of the trial was announced in August 2014.
Conviction upheld. In August 2016, the U.S. Attorney's Office for the District of Connecticut announced criminal charges against Kosinski, and the SEC similarly charged him with two counts of securities fraud. After a jury trial, in late November 2017, Kosinski was convicted of two counts of securities fraud-insider trading.
The Second Circuit upheld Kosinski's conviction. On appeal, Kosinski maintained that he kept the information confidential, but that his trading on the basis of that information was not a breach of his agreement. According to the court, Kosinski was a "temporary insider" with a fiduciary duty of "trust and confidence" not to trade the company's securities on the basis of confidential information he obtained during the drug study. Kosinski would not have been hired if he did not agree to keep the information confidential, the court said. Moreover, by using inside information to trade his shares, Kosinski's financial interest became aligned with the outcome of the study, thus undermining the study's integrity. The contract also required Kosinski to disclose if the value of his shares exceeded $50,000, which he failed to do.
Petition. The petition asks two questions concerning the duty of "trust and confidence": (1) whether a simple agreement to keep information confidential establishes a fiduciary relationship; and (2) whether the Second Circuit's case-by-case approach to the duty element of insider trading fraud is unconstitutionally vague. Kosinski argued that the Second Circuit muddied the law by holding that a mere promise of "confidentiality" establishes a duty of "trust and confidence" even in the absence of other indicia of fiduciary status or trust. The Supreme Court, however, has never even suggested that just an agreement to maintain information in confidence suffices to establish such a relationship, the petition said. Kosinski also asserted that the Second Circuit failed to articulate a clear standard for determining when such a fiduciary relationship exists, resulting in a "smorgasbord" of formulae and a case-by-case approach creating uncertainty.
Briefs for and against. In Kosinski's corner was entrepreneur Mark Cuban, who was previously the subject of an SEC insider trading action. Cuban's amicus brief argues that liability for insider trading cannot be imposed without a duty of trust and confidence—a mere obligation to keep nonpublic information confidential does not suffice. Cuban also criticizes the Second Circuit for failing to provide the clear, predictable rules that the market requires. In a brief in opposition, the United States said that no further review was warranted, agreeing with the Second Circuit that Kosinski was entrusted with confidential information for the purposes of the trial, and that there was an implicit understanding that the information was not to be used for Kosinski's personal benefit.
Other Court news. The Court is in the process of winding down it October 2020 Term, having heard its last case in the term on May 7, 2021. That case, Terry v. U.S., involved sentencing in criminal cases and may otherwise have the possible distinction of having been the last oral argument to be conducted remotely during the pandemic shutdown. The Court building is still closed to the public until further notice.
The court has been releasing cases by the handful, and, as of this writing, there are 18 opinions yet to be announced. Among these is one securities-related matter: Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System. The issue in Goldman involves the Basic presumption of reliance and whether the generic nature of a company's statements can be used to show a lack of price impact. Oral argument was held on March 29, 2021.
The petition is No. 20-1161.