Conservative Scalia a Skeptic of Insider Trading Law

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By Rob Tricchinelli

Feb. 16 — Supreme Court Justice Antonin Scalia's record on securities matters in the Roberts Court matched his overall conservative reputation, and his passing could tip the balance in a pending insider-trading case.

Scalia voted for a “restrictive,” pro-management outcome in securities-law cases more than half the time, according to a 2014 study by Harvard professor John C. Coates IV of Chief Justice John Roberts's tenure on securities law matters.

Coates's study showed that despite the ideologically divided court, the amount of polarization and dissent on securities-law cases under Roberts decreased from previous chief justices' terms.

Over that span, Scalia questioned the Securities and Exchange Commission's interpretation of its own power to go after insider trading, and he backed overturning the “fraud on the market” theory used by class action plaintiffs in fraud cases.

Scalia's death could lead to a jurisprudential shift on the court, including in the securities realm.

Insider Trading

Scalia was eager for the Supreme Court to take up an insider trading case, and his passing removes from the court a strong skeptic of deference to the SEC's interpretation of how to pursue those cases.

After the Second Circuit upheld the insider-trading conviction of Douglas Whitman, a hedge fund portfolio manager, he asked for high-court review in 2014.

His petition was denied, but Scalia and Justice Clarence Thomas issued a statement saying “a court owes no deference to the prosecution’s interpretation of a criminal law” and professed their suspicion of adhering to the SEC's interpretation “of law that contemplates both criminal and administrative enforcement.”

In January, the Supreme Court agreed to hear the case of Bassan Salman, whose conviction for insider trading was upheld by the Ninth Circuit . Although the case, Salman v. United States, presents questions of whether it is necessary for liability that an insider must receive a “personal benefit” when tipping nonpublic information, Scalia's 2014 statement indicates he was prepared to push for a less inclusive view of the boundaries of insider-trading law.

“The rule of lenity requires interpreters to resolve ambiguity in criminal laws in favor of defendants,” Scalia and Thomas wrote. “Deferring to the prosecuting branch’s expansive views of these statutes ‘would turn [their] normal construction . . . upside-down, replacing the doctrine of lenity with a doctrine of severity.'”

Class Actions

In June 2014, in Halliburton Co. v. Erica P. John Fund Inc., the Supreme Court didn't overturn the longstanding fraud on the market theory used by plaintiffs in securities class actions but expanded defendants' ability to rebut that theory. The theory states that investors presumably rely on efficient market prices, which reflect any alleged fraud.

Scalia didn't view the theory kindly. In a 2013 case involving class certification, Amgen Inc. v. Conn. Ret. Plans and Trust Funds, he said in dissent that it had been “invented by the Court”.

In Halliburton, Scalia and Justice Samuel Alito joined Thomas's concurring opinion that would have overturned the theory altogether .

“Logic, economic realities and our subsequent jurisprudence have undermined the foundations” of the theory, the concurrence said, “and stare decisis cannot prop up the facade that remains.”

The theory, they said, was based on “a questionable understanding of disputed economic theory and flawed intuitions about investor behavior.”

In his study, Coates called the separate opinion “somewhat ironic given their pro-market, de-regulatory ideological commitments.”

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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