Congress Should Define`Insider Trading': Ex-SEC Official

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By Che Odom

Feb. 24 — The U.S. Supreme Court's consideration of a “personal benefit” standard is the latest battle in a war over insider trading that has lasted decades, highlighting more than ever the need for a statutory definition of the term, a former regulator said Feb. 24.

“We have to accept that we have pushed the common law as far as we can, and we just have to come up with a statutory definition,” Jonathan G. Katz, a U.S. Chamber of Commerce representative and a former secretary of the Securities and Exchange Commission, said during Dorsey & Whitney LLP's annual Federal Enforcement Forum in Washington.

The Supreme Court agreed last month to hear Salman v. United States, an appeal from the U.S. Court of Appeals for the Ninth Circuit by an individual convicted of illegally trading on information provided by a relative .

Prosecutors' Burden

The high court's decision to hear the case is significant because it previously refused to review the Second Circuit's December 2014 ruling in United States v. Newman.

The main issue in Salman is whether prosecutors must show that the insider received a concrete benefit in exchange for passing on the information. The Ninth Circuit ruled that that wasn't required, splitting with the Newman court, which concluded that a person passing inside information must at least potentially get some benefit of value, such as money.

The eventual ruling by the Supreme Court may clarify what sort of benefit the tipper must receive .

Long-Running Issue

Courts as well as practitioners have been grappling with the personal benefit issue since the 1980s, and an opinion from the high court probably won't put an end to it, Katz said.

“I think all that Newman is doing is resurrecting the fights that occurred in the early '80s,” he said. “They continue to pop up every few years, as some judge with too much time on his hands starts looking into the metaphysics of common law fraud.”

A statute is needed to create some certainty in the law, he said. “Fraud on the market” could be used as a baseline standard for such a statute, he added.

Thomas O. Gorman, a Washington-based partner at Dorsey, said at the forum that he doesn't expect Congress to take up the matter, but said the Supreme Court will probably issue guidance on “personal benefit” in Salman.

The death of Justice Antonin Scalia, who has been characterized as a skeptic of insider-trading law , probably won't prevent the court from arriving at an opinion, Gorman said.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com