White Collar Roundup - September 2012

This Is Crazy, but You Know My Number, so Tell Me Maybe

What is "material, nonpublic information" under the securities laws? The U.S. Court of Appeals for the Second Circuit discussed the meaning of that phrase in the context of an appeal after a conviction for insider trading. In the case, a tipper passed information about the acquisition of a publicly traded company to various tippees, including the defendant. At trial, the district court refused to include language in its definition of "material, nonpublic information" indicating that "general confirmation of an event that is 'fairly obvious' to knowledgeable investors is not material, nonpublic information." The court also said that "[t]he confirmation by an insider of unconfirmed facts or rumors--even if reported in a newspaper--may itself be inside information." The defendant claimed the court's refusal to give the first instruction and its giving of the second were errors. The Second Circuit disagreed. It reasoned that the court's charge "informed the jury that for information to be material it must be considered significant by reasonable investors. It conveyed to the jury that material, nonpublic information is information that either is not publicly available or is sufficiently more detailed and/or reliable than publicly available information to be deemed significant, in and of itself, by reasonable investors."

Just a Note About Forfeiture

In footnote 3 of that same opinion, the Second Circuit struck a blow to the U.S. Attorney's Office for the Southern District of New York's position of what property is forfeitable in insider-trading cases. That office applied 18 U.S.C. 981(a)(2)(A), which defines "proceeds" for "cases involving illegal goods, illegal services, unlawful activities, and telemarketing and health care fraud schemes" to be the entire amount obtained, without regard "to the net gain or profit realized from the offense." So, in practical effect the office required defendants to agree in any plea agreement in insider-trading cases to forfeit the entire value of the securities sold based on the tip, without taking into account the purchase price. The court rejected that interpretation and applied 18 U.S.C. 981(a)(2)(B), because although insider trading is illegal, trading in securities is a lawful activity. Subsection 981(a)(2)(B) applies to "cases involving lawful goods or lawful services that are sold or provided in an illegal manner" and defines "proceeds" as "the...