Justices Scalia and Thomas Amenable to Reexamining Deference to SEC Statutory Interpretations
Like Prince Charming searching for the foot that fit the glass slipper, Justice Scalia recently issued a statement advising that he and Justice Thomas would be receptive to granting certiorari to a petition properly presenting the issue of whether, in a criminal context, a court should grant deference to an administrative agency’s statutory interpretation. And, like the townspeople who lined up to offer their own feet for consideration, lawyers across the country undoubtedly will offer the Court a variety of cases from which to choose.
On November 10, 2014, the Supreme Court issued an order denying certiorari in a matter where the Second Circuit had affirmed a criminal conviction under the securities laws. Whitman v. United States, 574 U.S. ___ (November 10, 2014). The order also included a brief statement by Justice Scalia, joined by Justice Thomas, reflecting the two Justices’ interest in considering the issue of agency deference in an appropriate future case.
The indictment in United States v. Whitman, 904 F. Supp. 2d 363, 365 (S.D.N.Y. 2012), charged the defendant with insider trading and conspiracy to commit insider trading, alleging that the defendant traded or agreed to trade on material non-public information he received from tippees who had, in turn, obtained the information from inside employees at several public companies. The district court charged the jury in accordance with established Second Circuit precedent, under which defendants violate the law when they trade while in “knowing possession” of material non-public information. On appeal the defendant urged the Second Circuit to adopt the Ninth Circuit’s standard instead, which provides that a defendant is liable only if the inside information was a “significant factor” in the investment decision. United States v. Whitman, 555 Fed. Appx. 98, 107 (2d Cir. 2014). The Second Circuit, however, acknowledged that it was bound by the Circuit’s controlling precedent and that the defendant’s proposed change could be adopted only by the Court sitting en banc. The controlling precedent on which the panel relied, United States v. Royer, 549 F.2d 886 (2d Cir. 2008), had adopted the “knowing possession” standard, partially relying on SEC Rule 10b5-1 which also applied the knowing possession standard. The Royercourt had held that the SEC’s interpretation of the securities statutes, as reflected in Rule 10b5-1, was entitled to deference under the Supreme Court’s decision in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc. 467 U.S. 837, 843-44 (1984). In Chevron, the Supreme Court ruled that where a statute is silent or ambiguous with regard to a particular issue, a court may not substitute its own construction of the statutory provision for a reasonable interpretation of the statute made by an administrative agency. Chevron, however, involved a civil administrative matter; not a criminal prosecution. Justice Scalia’s recent statement sharply criticized the Government’s position that deference to agency interpretations is equally required in a criminal context:
I doubt the Government’s pretensions to deference. They collide with the norm that legislatures, not executive officers, define crimes. When King James I tried to create new crimes by royal command, the judges responded that “the King cannot create any offence by his prohibition or proclamation, which was not an offence before.” James I, however, did not have the benefit of Chevron deference. With deference to agency interpretations of statutory provisions to which criminal prohibitions are attached, federal administrators can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain [internal citations omitted]. . . .
The Government’s theory that was accepted here would, in addition, upend ordinary principles of interpretation. The rule of lenity requires interpreters to resolve ambiguity in criminal laws in favor of defendants. Deferring to the prosecuting branch’s expansive views of these statutes “would turn [their] normal construction . . . upside-down, replacing the doctrine of lenity with a doctrine of severity.”
Whitman, 574 U.S. ___, at 2 (quoting Crandon v. United States, 494 U. S. 152, 178 (1990) (SCALIA, J., concurring in judgment).).
Justice Scalia nevertheless agreed that certiorari should be denied because the defendant did not seek review on the issue of deference, and the procedural history of the case made it a poor vehicle for the Court to address the issue. But Justice Scalia concluded by stating that “when a petition properly presenting the issue comes before us, I will be receptive to granting it.” Securities law practitioners and the defense bar are staying tuned for further developments in this area.