In footnote 3 of that same opinion, the Second Circuit struck a blow to the U.S. Attorney's Office for the Southern District of New York's position of what property is forfeitable in insider-trading cases. That office applied 18 U.S.C. 981(a)(2)(A), which defines "proceeds" for "cases involving illegal goods, illegal services, unlawful activities, and telemarketing and health care fraud schemes" to be the entire amount obtained, without regard "to the net gain or profit realized from the offense." So, in practical effect the office required defendants to agree in any plea agreement in insider-trading cases to forfeit the entire value of the securities sold based on the tip, without taking into account the purchase price. The court rejected that interpretation and applied 18 U.S.C. 981(a)(2)(B), because although insider trading is illegal, trading in securities is a lawful activity. Subsection 981(a)(2)(B) applies to "cases involving lawful goods or lawful services that are sold or provided in an illegal manner" and defines "proceeds" as "the amount of money acquired through the illegal transactions resulting in the forfeiture, less the direct costs incurred in providing the goods or services." So, as the court explained, "the only money that should be subject to forfeiture in an insider trading case is money acquired when shares are traded based upon inside information at a gain. In cases where the securities are sold at a loss to avoid further losses, the direct costs associated with the sale, namely the cost of purchasing the securities sold, would exceed the 'money acquired' in the sale."
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Just a note about forfeiture
- Day Pitney LLP
- September 4 2012
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