At the recent SEC Speaks conference:
SEC Solicitor Jacob Stillman said the Newman decision would lead to confusion because it altered the recognized standard for the personal benefit that must be shown to establish insider liability. ...
Deputy Director of Enforcement Stephanie Avakian said that the Second Circuit’s decision impacted only a subset of the Commission’s insider trading cases, but could still affect its ability to bring some cases, and, therefore, could hurt efforts to maintain investor confidence in the fairness and integrity of the markets.
Nonsense. In a recent amicus brief in the Newman case filed by yours truly, Todd Henderson, and Jonathan Macey, we explained that:
The panel’s opinion in Newman is both a correct application of the personal benefit test adopted by the Supreme Court in Dirks v. SEC and an important corrective to the government’s drive to expand the limits of insider trading liability. As the Dirks court appreciated, in the economically critical area of analyst-insider communication, a liability standard that is overly broad or unclear will deter market participants from seeking quality information on which to trade and thereby damage the healthy functioning of capital markets. The Supreme Court fashioned the personal benefit test accordingly, to draw a clear line between permissible and impermissible information gathering, so that analysts and investors would know when trading was permissible and not be needlessly deterred from seeking the best information available to them.
The government now seeks to dilute the Supreme Court’s test to the point where it would become, in the Newman court’s words, “a nullity.” Newman op. at 22. Under the government’s interpretation of personal benefit, almost any non- public insider disclosure could qualify, and the recipient of information would have no way of determining when trading on that information was permitted. The government’s misreading of Dirks would fundamentally undermine the policy imperatives that led the Supreme Court to adopt the personal benefit test as an important market-protective limit on insider trading liability, and would deter valuable analyst-insider communications, to the detriment of the market and of all market participants.
I recommend that the SEC read it before they misspeak again.
