Author: Dan Stroh, Associate Member, University of Cincinnati Law Review
The phrase “insider trading” does not have a positive connotation. Despite the lack of an express provision prohibiting trading on insider information, insider trading has long been prosecuted under anti-fraud provisions found in securities law regulations. A recent focus by the U.S. Attorney for the Southern District of New York, Preet Bharara, coupled with the conviction of a billionaire hedge fund manager, has brought renewed attention to this area of law. Mr. Bharara’s presence in the press, combined with his record in policing insider trading, have so far been largely successful in policing conduct harmful to the general public.
A recent ruling by the Second Circuit, however, threatens to undermine much of the work done by Mr. Bharara’s office. In United States v. Newman, a judge reversed the insider trading convictions of two traders with prejudice, declaring the guilty verdict unsupportable and barring the United States from retrying the defendants. By departing from prior case law interpreting certain elements of fraudulent insider trading, the court put an abrupt stop to many of the prosecutions of insider trading, which has reverberated throughout the legal community. Because the decision affects not only the ability of the government to prosecute insider trading in the future but also threatens to undercut much of the work done by Mr. Bharara, whether this decision will stand as is or be reheard will have a significant impact on the landscape of securities law.