The US Supreme Court has declined to hear the United States' challenge to the Second Circuit Court of Appeals' controversial decision on insider trading in US v Newman earlier this month.
This denial confirms government prosecutors, regulators and policy makers in the United States need to re-examine their respective approaches to insider trading and how they prosecute cases. For example, it has been reported that as a result of the US Supreme Court decision, top federal prosecutor in Manhattan Preet Bharara has now dropped the insider trading charges against Michael S. Steinberg — the highest-ranking employee at SAC Capital Advisors to stand trial for insider trading — as well as the guilty pleas of six cooperating witnesses.
As we have previously written in an extensive analysis, the Second Circuit Court of Appeal decision has been regarded as a sea change for insider trading and tipping law in the US. Essentially, the Newman case says that in order for a court to find an insider guilty of "tipping", prosecutors must demonstrate that he/she received a personal benefit for the tip. Correspondingly, to succeed against the "tippee", the prosecutor must prove that the tippee knew of the personal benefit obtained by the "tipper".
Some observers and participants in the American white collar criminal enforcement world point to the lack of statutory clarity for insider trading prohibitions, as a culprit which has led to increased uncertainty. In Canada, specific prohibitions are contained in securities statutes and the criminal code. That is not the case in the Unitised States. Indeed, recently Southern District Judge Paul Engelmayer, speaking to the Securities and Litigation Enforcement Institute of the New York City Bar, noted the need for the US to have legislation defining insider trading. This legislation would be in place of the US Supreme Court and the Second Circuit developed body of law, which is "ad hoc, case by case, essentially from scratch, [and] effectively as a matter of federal common law." The uncertainty regarding prosecuting insider trading cases in the US does not seem likely to be resolved in the near future.
Notwithstanding the specific legislative provisions in Canadian securities law, however, interpretations can and do vary, with regards to the evidence leading to an insider trading or tipping violation. For example, where circumstantial evidence is relied upon, as is the case in many insider trading and tipping cases, divergent findings are possible. For example, in Azeff, Re, the OSC found that the circumstantial evidence amounted to clear and cogent proof of a violation of securities law. On the other hand, the Alberta Court of Appeal in Walton v Alberta Securities Commission, albeit in a different context, suggested that adjudicators will be required to ensure that presumptions about an accused's state of mind need to have a reasonable basis in the evidence, implying something more than mere circumstantial evidence is required to meet the required standard.
We will continue to monitor and write about developments to both the US and Canadian securities law as it evolves by way of judicial interpretation.
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