This is the question recently asked by Gene Levoff, a former attorney at a large technology firm traded on the NASDAQ stock exchange. The indictment against Mr. Levoff charges him with securities fraud and alleges that between 2011 and 2016, Mr. Levoff used material non-public information to trade securities before his employer’s securities commission filings were made public. According to the indictment, Mr. Levoff realized profits of $227,000 and avoided losses of $377,000.
Mr. Levoff moved to dismiss the charges against him, arguing that because there is no statute that explicitly criminalizes insider trading, the indictment must be dismissed. The District of New Jersey trial court, predictably, denied Mr. Levoff’s motion this week, finding that it was a “classical” case of insider trading, whereby a person uses “manipulative or deceptive device” to engage in securities trading. 15 U.S.C. § 78j. A manipulative or deceptive device, in turn, is defined by SEC regulation to include “the purchase or sale of a security . . . on the basis of nonpublic information about that security.” 17 C.F.R. §240.10b5-1(a). Because the indictment alleged that Mr. Levoff relied on material, non-public information in making his trades, the case is open and shut, as the saying goes.
But should it be?
There is little doubt that the district court reached the proper result using the existing case law. Taking a step back, however, there is reason to question the validity of the government’s position. Mr. Levoff was charged with securities fraud, but who was defrauded? It can’t be the purchaser of the securities—that person received exactly that for which he bargained: a share of securities. See, e.g., United States v. Frost, 125 F.3d 346, 362 (6th Cir. 1997) (reversing mail fraud conviction where seller failed to disclose conflict of interest, but buyer still received the fruits of the bargain). Moreover, the sale of securities, unlike most other commercial transactions, may not even have an identifiable buyer and seller; it may be very difficult, if not impossible, to identify the person that actually purchased Mr. Levoff’s shares. The reverse situation, where the insider is a buyer of securities rather than a seller, is even more difficult to defend as a fraud because the seller has already made the decision to sell and if the shares are not sold to the insider, they would be sold to someone else, perhaps at a lower price.
Although insider trading has long been considered unlawful, it does reflect a troubling trend by the government in criminal cases to divorce words from their common law meaning in an effort to expand the scope of the law. The Supreme Court, in a series of decisions over the past several terms, has begun to reign in the overreach with respect to bribery and corruption prosecutions, but in other parts of the law, no end appears in sight. At common law, a fraud would require a materially false statement, made with the intent to deceive, reliance, and damages. Insider trading meets none of these criteria, yet it is still prosecuted as a species of securities fraud. Even under the definition of securities fraud in Title 15, it is difficult to classify insider trading as a “manipulative or deceptive device,” since no person was being misled or deceived by any false information and receives precisely the benefit of the bargain.
It seems safe to say that few courts will dismiss charges against employees charged with insider trading, and this may be the correct result given the long history of insider trading prosecutions. We should, however, continue to be aware of and guard against further creep of criminal law into areas that may involve reprehensible, but not necessarily illegal conduct.