January 9, 2020

Insider Trading: 2nd Cir. Makes Prosecutors’ Day

In response to uncertainties surrounding insider trading law under Section 10(b) of the Exchange Act, in recent years federal prosecutors have increasingly opted to rely on another federal statute – 18 U.S.C. §1348 – in bringing criminal insider trading cases. On its face, that statute, which was enacted as part of Sarbanes-Oxley, requires only the existence of fraudulent intent and a scheme or artifice to defraud in connection with the sale or purchase of a security. That allows prosecutors to avoid dealing with Section 10(b)’s more thorny requirements, such as the need to establish the existence of a relationship of trust or confidence and the receipt of a personal benefit.

The ability of federal prosecutors to rely on this statute was recently given a boost by the 2nd Circuit’s decision in U.S. v. Blaszczak, (2d. Cir.; 12/19), which affirmed that 18 U.S.C. §1348 doesn’t require the government to establish a personal benefit. This excerpt from Proskauer’s memo on the case explains the Court’s reasoning:

The court explained that “the personal-benefit test is a judge-made doctrine premised on the Exchange Act’s statutory purpose,” which is “to protect the free flow of information into the securities markets” while “eliminat[ing] [the] use of inside information for personal advantage.”

Securities fraud under Title 18, in contrast is “derived from the law of theft or embezzlement,” where a breach of duty (including receipt of a personal benefit) is not an additional prerequisite. “In the context of embezzlement, there is no additional requirement that an insider breach a duty to the owner of the property, since it is impossible for a person to embezzle the money of another without committing a fraud upon him.

Because a breach of duty is thus inherent in . . . embezzlement, there is likewise no additional requirement that the government prove a breach of duty in a specific manner, let alone through evidence that an insider tipped confidential information in exchange for a personal benefit.”

The defendant complained that this interpretation of the statute would broaden the government’s enforcement power with respect to insider trading cases – but the Court concluded that this was a feature of the law, not a bug.

Insider Trading: What Does Blaszczak Mean for SEC Enforcement?

Because 18 U.S.C. §1348 is a criminal statute, the Blaszczak decision isn’t going to be much use to the SEC in its civil insider trading enforcement proceedings. In those cases, the SEC is going to have to continue to satisfy the somewhat murky requirements imposed by Section 10(b). As this WilmerHale memo notes, that seems a little goofy:

The decision also raises the prospect that a person could be criminally prosecuted for securities fraud for tipping schemes that could not be reached in a civil securities fraud action brought by the Securities and Exchange Commission—a seemingly illogical result.

The memo goes on to suggest that this disconnect “is likely to strengthen calls for insider trading legislation that would create a consistent standard.”

ESG:  SASB’s Sustainability Accounting Standards Gaining Traction?

Last year, we blogged about the SASB’s publication of the first-ever the first-ever industry-specific sustainability accounting standards. The standards covered 77 different industries, and were designed to enable businesses to identify, manage & communicate financially-material sustainability information to investors. According to this recent IR Magazine article, the SASB standards appear to be gaining traction with both companies & investors:

It’s been one year since the Sustainability Accounting Standards Board (SASB) launched its 77 industry-specific reporting standards, and the non-profit says 120 companies are now using the standards in their ESG reporting.

SASB launched its standards in November 2018, having worked with a large investor advisory group since 2011 to determine the material ESG factors issuers should be updating investors on. The investor advisory group continues to expand, and SASB announced last week that six new investors had signed up to participate – bringing the count to 49 firms, representing more than $34 trillion in assets under management.

The SASB’s sustainability accounting standards are available on its website. Early adopters of the standards include GM, Nike, Merck & JetBlue.

John Jenkins