Bharara Task Force Overlooks California Insider Trading Statute
I have long advocated for a federal statutory definition of insider trading because I believe that the current approach has been for the courts to convict first and then explicate the theory supporting the conviction in a later appellate opinion. As the Queen of Hearts famously enjoined "sentence first - verdict afterwards".
Although federal insider trading has its basis in a statute and rule (Section 10(b) of the Securities Exchange Act and Rule 10b-5), neither statute nor rule mentions insider trading in hae verbae nor does either prescribe the elements of the crime. It has been left to the courts to define the crime. As a result, insider trading has become more of a common law, rather than statutory, crime. This would seem to conflict with the U.S. Supreme Court's holding that all exercises of criminal jurisdiction by the federal courts in common law cases is not within their implied jurisdiction under the Constitution. United States v. Hudson & Goodwin, 11 U.S. 32 (1812).
Recently, Phreet Bharara, the former U.S. Attorney for the Southern District of New York, chaired a task force on insider trading. The task force concludes that "A legislative solution, in the form of a new statute expressly setting out the elements of an insider trading offense, would be the best vehicle for such reform". The task force proposes the following proposed statute:
"It shall be unlawful for any person, (a) directly or indirectly, to purchase or sell any security, while in possession of material, nonpublic information relating to such security, knowing that such information had been obtained or communicated wrongfully, or (b) to wrongfully communicate or communicate wrongfully-obtained material, nonpublic information knowing that such information will be used in the purchase or sale of any security."
The task force proposal also includes definitions of "wrongfully" and the knowledge requirement.
Although the task force's report includes a succinct review of insider trading laws, it fails to even mention that California has had an insider trading statute, Corporations Code § 25402, on its books since 1968 (effective Jan. 2, 1969). Why ignore California's half century of experience? For more on the California law, see my article, California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (July 2003).