Wednesday, August 31, 2016

Your "justice" department at work

The September issue of Forbes magazine has an interesting case about the plight of trader Todd Newman, whose insider trading conviction was overturned by a court of appeals, and then the Supreme Court, by refusing to take the case, affirmed that ruling.

What is at stake?  As many who have been "educated" in insider training by their companies know, there is really no actual law around insider trading except a provision in the law to prevent fraud in trading.  Historically, as the article notes, it's punished when the tipper is rewarded for inside information that the company prohibits disseminating--really it depends on what the company decides is illegal use of its information.

For Newman, however, prosecutor Preet Bharara used a novel interpretation that did not prosecute any tippers (there were four layers, something of a "telephone game" tipping), the tip was actually wrong, broke legal ground in using wiretaps and raids, whether Miranda rights were read is disputed, and a 20 minute drive to a courthouse apparently took an hour and a half.  Most importantly, historically it's vital to prove that the tipper and the recipient know that it is nonpublic information obtained illegally, but Bharara and prosecutress Antonia Apps persuaded the judge to ignore this provision.

In other words, Bharara and Apps were making up the law as they went along and using various intimidation tools to try to make it stick.  In the process, they destroyed a company and the careers of many of its employees, depriving at least half a dozen people of years of their lives.

What to do?  Well, given the definition of fraud I've linked above, the question of intent and compensation certainly ought to play a part in insider trading law, and first of all Congress ought to actually define it.   Moreover, since Bharara and Apps apparently forgot their lessons on Article 1 of the Constitution, I'd suggest that at least two other people need to lose their careers as a result of this. 

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