Counsel for defendant Anthony Chiasson used a rhetorical mocking tone in the appellate brief filed on his behalf in response to the DOJ’s petition for rehearing en banc in United States v. Newman. The brief opens by likening the DOJ to “Chicken Little” screaming “the sky is falling,” arguing that the Government’s rehearing petition “echoes Chicken Little’s complaint.” It then declares that the DOJ’s “tone is less that of a frightened hen and more that of a petulant rooster whose dominion has been disturbed.” The brief later takes a rhetorical shot at the SEC: “The SEC, like “Turkey Lurkey” in the “Chicken Little” folk tale, joins in the lament that the regulatory “sky is falling.” (Dropping a footnote to explain who Turkey Lurkey is seems more than a little self-indulgent.) A copy of the Chiasson brief can be found here: Brief of Anthony Chiasson in opposition to DOJ Petition for Rehearing en banc in U.S. v. Newman and Chiasson.
An appellate brief is not a blog post (where we have in the past taken the Government for “sky is falling” arguments: see SEC’s Amicus Brief in U.S. v. Newman Fails To Improve on DOJ’s Effort). Rhetoric rarely is the winning play in an appellate brief, and ridicule is a dangerous way to play the upper hand in an appellate dispute with the Government. That is especially so when a “just the facts ma’m” approach seems well-tailored to win the day.
Fortunately, the Chiasson brief does come back down to earth to present compelling arguments in favor of denying the rehearing petition. The brief does point out in its first section that “contrary to the government’s argument, the Opinion leaves intact the rule that the government can prevail if it shows that the tipper made a gift of material nonpublic information to a friend, anticipating and intending that the friend would trade on the information and earn trading profits. . . . However, the mere existence of a friendship, and the disclosure of information to a friend, is not enough. There must be either the expectation of a quid pro quo or the intention that the recipient trade on the information and reap profits. This analysis is faithful to Dirks and its progeny.” Chiasson Brief at 6-7. And it also captures the key flaw in the DOJ’s approach to the “personal benefit” requirement: “In its Petition, as in its prior briefing, the government ignores the central point of Dirks, which identifies the tipper’s exploitation of confidential information for personal benefit as the gravamen of culpable insider trading. Rather than accepting this rule of law, which has been stated more than once by the Supreme Court, the government apparently wishes to water down the meaning of ‘personal benefit’ so that, as a practical matter, it can bring insider trading charges whenever someone trades on material nonpublic information that is disclosed without authorization by a company insider.” Id. at 7-8.
Most importantly, the brief emphasizes that an insider trading section 10(b) violation must be anchored in fraud, noting that conduct that “may violate corporate policy or the SEC’s Regulation FD” but still not be “fraudulent self-dealing under Dirks and its progeny, and does not open the door to prosecution for insider trading.” Id. at 8. They might have added that the “personal benefit” requirement is what converts the conduct to fraud, which requires deceit to obtain property or its equivalent.
All of this harkens back to the decision in Dirks v. SEC itself. The DOJ and SEC arguments in Newman effectively seek a Second Circuit imprimatur that they may elide the Dirks opinion. The Dirks Court noted that the requirement was critical to assure there were limits on the breadth of insider trading enforcement actions, which the DOJ and SEC are now trying desperately to avoid: “Determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts. But it is essential, we think, to have a guiding principle for those whose daily activities must be limited and instructed by the SEC’s inside trading rules, and we believe that there must be a breach of the insider’s fiduciary duty before the tippee inherits the duty to disclose or abstain. In contrast, the rule adopted by the SEC in this case would have no limiting principle.” Dirks v. SEC, 463 U.S. 646, 664 (1983). Lest this not be perfectly clear, the Dirks Court added by footnote: “Without legal limitations, market participants are forced to rely on the reasonableness of the SEC’s litigation strategy, but that can be hazardous, as the facts of this case make plain.” Id. n.24. Chiasson or Newman might well add: “as the facts of this case make plain as well.”
The Chiasson brief goes on to explain why the DOJ provides no valid reason for a rehearing to reconsider the analysis of the evidence of personal benefit in the panel decision. This is especially so as to the lack of any evidence of knowledge by Messrs. Newman or Chiasson of any possible personal benefit that may have flowed to the original tippers. As the brief points out: “The government now explicitly declines to challenge” the key holding “that a tippee must know that an insider has disclosed material nonpublic information in exchange for personal benefit in order to commit insider trading.” Id. at 2.
Finally, the brief does a good job of laying waste to the Government’s contention that the Newman decision “threatens the integrity of the securities markets” (albeit with unnecessary recurring references to Chicken Little). The brief points out that virtually all of the DOJ’s and SEC’s traditional insider trading cases are unaffected by the Newman decision. It goes on: “It is only recently that the government has decided to push the doctrinal envelope, and bring cases in which tippers have not been charged with criminal acts and the defendants are remote tippees who are ignorant of the circumstances attending the tippers’ disclosure of material nonpublic information. To the extent that convictions are jeopardized because the government cannot prove that the tippees knew that the tippers were receiving a personal benefit . . . the government is not in a position to complain. The Court has determined that such knowledge is required, and the government has explicitly decided not to contest this holding on rehearing.” Id. at 19.
In the finale, Chaisson argues that “there is no indication” that the Government intends to abide by the law as stated by the Supreme Court. It chastises the DOJ for taking conflicting positions in its insider trading cases, which “reflects either its confusion about insider trading doctrine or, worse, its inclination to take whatever legal position serves its immediate interest in a particular case. At best, it illustrates that the government’s legal analysis about the subtleties of insider trading jurisprudence should be taken with a considerable grain of salt. The law as depicted in the brief that the government filed in this case—on a point with which this Court agreed—is now portrayed as something that is not the law and never was the law!” (Violating the sound practice that one never, never uses an exclamation point in an appellate brief.)
The conclusion is as it should be, pointing out that any “confusion” in the law could and should easily be handled by the SEC in its rulemaking capacity: “[T]o the extent that the government and the SEC do sincerely believe that their enforcement agendas are threatened by the decision in this case, the SEC can promulgate a regulation either implementing a different formulation of the ‘personal benefit’ requirement or defining what constitutes fraudulent insider trading. Having failed for more than 50 years to issue a regulation that defines insider trading, it is remarkable that the agency now comes before this Court to complain about ‘confusion’ in insider trading jurisprudence. If there is any ‘confusion,’ it results mainly from the SEC’s refusal to use its authority to promulgate an appropriate regulation. It has been content instead to leave the job of defining insider trading to the courts, basking in the freedom to bring cases on a ‘we know fraud when we see it’ basis. Having left to the courts the job of articulating the meaning of insider trading, the SEC should not now be heard to complain about ‘confusion’ when it gets a result that it does not like.”
One hopes and expects that the Second Circuit judges will look past the questionable rhetorical flourishes and focus on the strong substantive arguments laid out in the Chiasson brief.
February 22, 2015
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