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From Securities Regulation Daily, January 26, 2015

SEC to back U.S. Attorney’s try to upend Newman

By Mark S. Nelson, J.D.

The SEC plans to file a friend-of-the-court brief in support of the Manhattan U.S. attorney’s office’s bid to persuade the Second Circuit to rethink its decision last December making it harder for prosecutors to charge some individuals with insider trading. The SEC, in a brief yet to be officially filed with the federal appeals court, said it “agrees” with the U.S. that the Second Circuit should take another look at how its decision affects insider trading law that was developed under Supreme Court and many circuit court precedents. The SEC asked the appellate court for permission to file its brief today (U.S. v. Newman, January 26, 2015).

According to the SEC, the Second Circuit panel, or the full court, needs to rehear the Newman case to clarify its definition of “personal benefit” and the degree of proof needed to show this aspect of an insider trading case. The SEC said Newman, as it stands now, may call into question the agency’s ability to bring insider trading cases in support of its legal mandate to ensure the fairness and integrity of securities markets. To this end, the SEC would have the panel or full court restore friendship as one mode of showing a personal benefit.

Unlike with a direct pecuniary gain, liability would arise from the insider’s intent to benefit the person who gets the inside information. Put another way, the SEC said, this scenario is akin to one where the tipper traded on the inside information and then gave the illegal gains to a friend. The SEC said the Exchange Act makes this type of behavior unlawful by barring a person from committing a securities violation through another person. Moreover, the SEC said this was precisely what the Supreme Court in Dirks had in mind when it suggested that personal benefit can arise from the gift scenario.

The SEC will dispute the Second Circuit’s narrow view of what constitutes a benefit, despite that court’s own acknowledgment that “personal benefit” can have a variety of meanings, including ones that are non-pecuniary (e.g., “reputational benefit” or the “gift of confidential information to a trading relative or friend”). The SEC also will say it disagrees with the Newman court’s holding that the proof must be of a more meaningful relationship, one that is “objective, consequential” and has the possibility of resulting in a “potential” pecuniary gain.

According to the SEC, its concerns about Newman reach far beyond just the courts in the Second Circuit because the Newman holding runs counter to all other circuits that have dealt with the same issues. The SEC also pointed out that the Newman court never addressed the violation of securities laws through another, something that is unlawful under Exchange Act Section 20(b). As an example of how significant the Newman decision’s impact on the agency could be, the SEC cited 12 cases in the Second Circuit alone that depend on the theory now limited by Newman; the SEC said the impact would be even greater if it had cited all of the settled, civil enforcement actions in the second circuit.

The case is No. 13-1837.

Attorneys: David D. Lisitza for the SEC.

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