The Rule of Lenity and the Enforcement of the Federal Securities Laws

By Currier, Anna | American University Business Law Review, January 1, 2016 | Go to article overview

The Rule of Lenity and the Enforcement of the Federal Securities Laws


Currier, Anna, American University Business Law Review


Introduction

Since the Supreme Court's landmark decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council Inc. ("Chevron"), it has been settled law that courts owe deference to an executive agency's interpretation of a "statutory scheme it is entrusted to administer.... The principle, of whether statutory construction will continue to apply in cases involving the enforcement of the federal securities laws, is now in question.

Included in Justice Scalia's concurrence in Whitman was an invitation of sorts, expressing his favorable disposition toward granting certiorari in a case that presented the Supreme Court with the opportunity to decide whether lenity trumps deference where a rule or statute has both administrative and criminal application.2 The implication of Justice Scalia's concurrence for the enforcement of the federal securities laws are unprecedented in their scope and impact.3

In Whitman v. United States, Whitman had been convicted of insider trading as a secondary tippee,4 and the Second Circuit affirmed his conviction.5 The Second Circuit followed this rationale in United States v. Royer, which held that a defendant commits insider trading in violation of Section 10(b) when he trades "while in knowing possession of nonpublic information material to those trades."6 Royer was based in part on the Court's reading of the Commission's interpretation of Rule 10b5-l7, which defines insider trading as a manipulative and deceptive device8 and adopts an awareness standard for insider-trading liability under Section 10(b).9

In December 2014, the Second Circuit ("Court") decided another criminal insider trading case: United States v. Newman.'0 In Newman, the U.S. Attorney's Office for the Southern District of New York ("Government") argued that it was sufficient to prove a violation under Rule 10b5-2 by showing that a tippee had traded on material, nonpublic information with knowledge that the information was tipped in breach of a fiduciary duty.11 The Second Circuit rejected this formulation and, appearing to implicitly adopt Justice Scalia's approach, the Court embraced a standard that imposed a heavier burden on the Government. This heavier burden was exemplified by the Court's holding that a breach of fiduciary duty is only committed if there is a personal benefit to the tipper, and the Government must prove beyond a reasonable doubt that the tippee had knowledge of both the fiduciary duty and the personal benefit.12 The Second Circuit in Newman defined personal benefit with specificity; the Court held that the Government would need to prove a "meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," and the Government must bring evidence of "a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter]."13 Newman relied in part on the Supreme Court's decision in Dirks v. SEC, a civil insider trading case decided before the Commission had promulgated Rules 10b5-l and 10b5-2.14

On July 30, 2015, the Government filed a petition for writ of certiorari with the Supreme Court.15 In the petition, the Government argued that Newman's holding sharply contrasted with Dirks because the former opinion articulated a heightened personal benefit requirement that rejected Dirks' previous definition of personal benefit, a benefit that was explained by the Second Circuit as one that could be "inferred from a personal relationship between the tipper and the tippee."16

This Comment will discuss Newman's potential impact on the enforcement of federal securities laws. Specifically, it examines whether subordinating deference to the rule of lenity, combined with a federal court's denial of deference to the Commission in insider trading prosecutions brought under Rule 10b-5 as recently seen in Newman, signals an important change in the enforcement of the federal securities laws in criminal proceedings. …

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