Poetic Expansions of Insider Trading Liability

TLDR: Guttentag and Nagy as discussed by the authors argued that the entire tipper-tippee framework first laid out by the Supreme Court in Dirks, including the personal benefit test, has been rendered obsolete by subsequent common law and regulatory developments that have fundamentally transformed the U.S. insider trading enforcement regime.

Abstract: Professors Michael Guttentag and Donna Nagy have each offered arguments suggesting that the entire tipper-tippee framework first laid out by the Supreme Court in Dirks, including the personal benefit test, has been rendered obsolete by subsequent common law and regulatory developments that have fundamentally transformed the U.S. insider trading enforcement regime. These developments include: (1) the Supreme Court’s endorsement of the misappropriation theory in United States v. O’Hagan, (2) recent state court decisions offering more expansive accounts of what conduct constitutes a breach of fiduciary duty of loyalty in the corporate context, and (3) the SEC’s adoption of Regulation FD in 2000. Both Guttentag’s and Nagy’s arguments are erudite and quite creative. Such creativity is a virtue in law professors, but not in prosecutors. Exercising poetic license to expand criminal liability risks violating the time-honored principal of legality and leaving citizens without adequate notice of the crimes for which they may be charged. Insider trading law in the United States is already plagued by vagueness, and concern over prosecutors’ continued exploitation of this ambiguity to push the line of liability further and further out is part of what motivated the Second Circuit to push back in Newman. I share the Newman court’s concern. In this short article, I summarize what I take to be the most crucial aspects of Guttentag’s and Nagy’s arguments. I then offer some criticism. Specifically, I explain why I regard these interpretations as poetic expansions (rather than straightforward readings) of the law, a conclusion that was only strengthened by the Supreme Court’s recent decision in Salman.