Today we welcome former SEC attorney, James A. Kidney, as a guest columnist to our front page. Mr. Kidney brings 25 years of SEC experience and wisdom to the conversation. Here’s the backdrop:
The U.S. Department of Justice has been burning through millions of dollars of taxpayer money chasing down suspected insider traders who are four and five times removed from the person leaking inside information; convening grand juries to indict the traders; convincing trial courts to send them off to prison. The Securities and Exchange Commission has gone after the same individuals, banning them for life from the industry. That’s the same DOJ and SEC that have failed to bring charges against one CEO of a major Wall Street firm for the crash of 2008 — the greatest and most corrupt financial collapse since the Great Depression.
Last week, in a wide-reaching decision, the U.S. Court of Appeals for the Second Circuit, in United States of America v Todd Newman, Anthony Chiasson effectively advised Americans that the Department of Justice has grossly misapplied insider trading laws. And since the SEC has targeted the same individuals using the same legal principle, the decision means the SEC also doesn’t understand the laws it is supposed to be carrying out.
In a nutshell, the Court found that to be guilty of a crime the person trading on inside information has to have knowledge that the inside tipster breached a duty of trust to the corporation in exchange for a personal benefit. That knowledge was missing in many of these traders who were four and five times removed from the tipster. In fact, the court found that there may not have even been a tangible personal benefit to the tipster.
In simple terms, if a corporate insider gives material non-public information to a trader in exchange for cash or something of value, and the same trader then trades on that information, that’s a classic case of insider trading. But when the traders have no knowledge of any personal benefit given to the tipster, there is no insider trading crime.
Whether this is good law or bad can be debated. For example, corporate insiders might leak information for no current personal benefit on the hope or expectation that in the future they’ll be rewarded with a plum job and fat compensation at the trader’s firm. (That form of quid pro quo is a staple on Wall Street.)
The message the Appeals Court might have been subtly sending to the DOJ and SEC is to stop casting their wide net at people four times removed from a crime scene and go after the real criminals on Wall Street whose past and current actions pose a real and pressing danger to the entire financial system.
We turn the discussion over to James A. Kidney, who caused quite a stir earlier this year in a speech at his retirement party criticizing SEC management for policing “the broken windows on the street level” while ignoring the “penthouse floors”.