In the Summer 2016 edition of The Advocate, we discussed the Supreme Court’s agreement to hear the Salman v. United States case and to clarify standards for insider trading liability. Late last year, the Court’s unanimous decision in the case was welcome news to those opposed to insider trading. The decision confirms that a tipper — i.e., someone who divulges non-public company information — breaches a fiduciary duty by giving a tip to a trading relative or friend. This clarifies that in order for the tipper to be liable for insider trading, a tipper need not receive something of “a pecuniary or similarly valuable nature” in exchange for the tip. This less restrictive view of insider trading liability affirmed the Ninth Circuit’s holding and rejected a prior, contrary ruling by the Second Circuit in US v. Newman.
Judge Jed S. Rakoff of the United States District Court for the Southern District of New York played an active role in both the Salman and Newman cases. He was the author of the 2013 Newman district court decision that the Second Circuit reversed. He was also the author of the Ninth Circuit’s now-affirmed Salman opinion while sitting by designation on the Ninth Circuit.
Following the Supreme Court’s anti-insider-trading Salman ruling, Judge Rakoff is now calling for a more straightforward insider trading statute to replace the existing framework, which consists largely of judge-made rules. Speaking at the Securities Litigation & Enforcement Institute at the New York City Bar on March 1, 2017, Judge Rakoff called for Congressional action to simplify and expand the definition of insider trading by adopting an approach similar to that taken by the European Union. Judge Rakoff noted that the EU’s Market Abuse Regulation (MAR) bars insider dealing through a prohibition on the unlawful disclosure of inside information. The MAR’s basic goal is to promote and maintain fair markets by making it unlawful to disclose inside information that may have a significant effect on the price of a financial instrument. Judge Rakoff praised the MAR for its flexibility, noting that “[b]ecause the EU approach focuses not on fraud but on equality of access, it has virtually none of the difficulties that plague US law.” Specifically, Judge Rakoff noted that the MAR allows for punishment of individuals who “ought” to know that their trading is wrongful. Time will tell whether Judge Rakoff’s call for a statutory solution to the shifting landscape of insider trading liability will resonate with Congress.