There are two types of insider trading. One is legal, the other is not.
The legal version is when corporate insiders, such as officers, directors or employees buy or sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC, through filings (form 4, I believe). These trades cannot be based on non-public information.
The illegal type of insider trading involves buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
The relevant Securities law and case law on insider trading are as follows:
The 1934 Securities Exchange Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b).
Section 10(b) makes it unlawful for any person "to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe."
(And there are other sections of the 1934 act which come into play, such as 14(e), but this is a primer, so I'll be brief.)
To implement Section 10(b), the SEC duly and lawfully adopted Rule 10b-5, which provides, in relevant part:
It shall be unlawful for any person, directly or indirectly (a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of a security.
These broad anti-fraud provisions, make it unlawful to engage in fraud or misrepresentation in connection with the purchase or sale of a security. It is on the basis of those provisions that the courts have exercised their lawful authority to make US case law on insider trading.
As I've pointed out to you previously at linked pages, Congress has twice passed major legislation addressing, among other things, the penalties for this violation:
The Insider Trading Sanctions Act of 1984, Public Law 98-376 [H.R.559], August 10, 1984
and
The Insider Trading and Securities Enforcement Act of 1988, Public Law 100-704 [H.R.5133] November 19, 1988.
The substantive law of insider trading is judge-made case law which on several occasions has reached the USSC. Let that sink in. Give it a minute to register. Not all the laws dealing with insider trading are found in the US Code, only some of them. It's just a legal fact. You don't have to like it, but please stop arguing about it.
The core principles for a determination of illegal insider trading are set forth in three USSC cases (yep, there are more, but again, this is a primer for your benefit):
Dirks v. SEC, 463 U.S. 646 (1983). This opinion establishes that the insider breaches that fiduciary duty if he acts against the corporate interest; and that the recipient of the information has an obligation to refrain from trading only if he knows the guilty circumstances under which the information was passed along to him.
United States v. O'Hagan, 521 U.S. 642 (1997). This opinion made clear that the breach of duty by which the information is obtained and its illegal use, could involve a duty of trust and confidence other than between a corporate insider and the shareholders of the corporation whose securities are traded.
If you still want to believe there is no legitimate basis for insider trading convictions in the US Code or federal case law or SEC regs, fine. Believe whatever you want. I'm sure Mr. Waksal will be glad to know that at least somebody believes his conviction on insider trading charges is a miscarriage of justice and a violation of his constitutional right to cheat his shareholders.
This is my last post to you on this subject. Say whatever you want.
Please keep on posting the much needed FACTS!
But first…a little comment from a real lawyer:”Administrative law is an oxymoron”. You tell us what it means. I think it’s been my point all along.
First, let’s let one of the issue sites make a comment (“Let this sink in”): "Although properly speaking, regulations are not law, rules and regulations have the full force and effect of the law" -
Nice website. But they go a little overboard towards the end there. But the point remains…..Federal rules are not Statutes. Period. Case law since the late 1930’s has basically clarified that the Statutes can make a rule have the same weight as a Statute, but…they still cannot convert the one into the other. Sort of legal entropy if you will. You can’t go backwards.
And so there are two questions that pervaded our little back and forth…
- You assert that violations of Federal Regulations are crimes, and that agencies, like the SEC, can mete out criminal punishment.
- You assert that “Insider Trading” is a crime by virtue of case law and SEC Rules, specifically.
To answer both of these, let’s take a little walk through the website that you linked to:
So, if they just have crimes to pursue, how come they have a law court? This isn’t a federal court:
Funny, huh? All they have is references to their Civil litigation actions they have brought, Administrative law court decisions (that’s what the ALJ Initial Decisions and Orders line is about), and other civil actions.
It appears that they do precisely what I said they do:
Note that enforcement "actions" are only against "regulated persons".
That is: "In proceedings against regulated persons, the Commission is authorized to order the payment of civil penalties as well as disgorgement"
NOTHING ABOUT IMPOSING CRIMINAL SANCTIONS. THOSE ARE REFERRED TO THE DOJ FOR PROSECUTION IN THE FEDERAL COURTS. (Let that “sink in”).
So just how do we get to a criminal court? Well, we’d have to violate a law, right? How in the world could violating a Rule be criminal – after all, I just showed you the SEC’s own enforcement division web page…and they said nothing about things like how you get to prison. Just things like how they can fine you, or take away your license…oops, all the things I said they do about 5 posts ago. So where oh where does the law come in – and not by the back door of case law like Chiarella or O’Hagen.
That’s easy. Through the United States Code – NOT the Code of Federal Regulations. You keep alluding to the 1934 Securities and Exchange Act? That is precisely what 15 USC Chapter 2B is: 15 USC 2B
If you’re reading O’Hagen or whatever, and you read someone say something like “This was a violation of the 1934 Securities Act”, well, what they really meant was 15 USC 2B. The long version is just how the chapter can be cited. So don’t get confused and think that the Securities Act is something special, and standing alone all by itself. It isn’t. It’s an ordinary chapter in the USC. Again, NOT the CFR.
The whole chapter is listed here:
So all of the authority for the SEC and the declarations of what is lawful and unlawful in relation to the 1934 Act therefore are contained in this chapter. All SEC regulations and case law derive their legitimacy from this Chapter. If violation of an SEC rule is to somehow be transformed into a crime, it has to come from here, because no place else does it say that in general, “rules is crimes”.
That occurs here, in a rather general way: 15 USC 78j
Didja get that part? "Insider trading" is not a Statute, but is in fact left specifically to the SEC to define as a rule! Therefore:
"Insider trading" is only "unlawful" by inference of the operation of 15 USC Chapter 2B Sec. 78j, which says that it's unlawful to violate the fraud or deceptive device or insider trading rules so adopted by the SEC under their authority.
Let’s stop right there. Didja really, really get that subtlety? The Statute says it’s against the law to violate the regulation. The regulation by itself has no authority. All of it derives from………the Statute. By itself…the rules are civil matters. When you violate Rule 10b-5, it’s only a crime because….you’re really violating 15 USC Chap. 2B Sec. 78j.
Is this really difficult for you to understand?
Note that the Civil Liability for "insider trading" is actually here: 78t-1
And here is the actual penalty that is all the SEC can "impose" by itself, spelled out: 15 USC 78u-2
Note that it requires "willful violation". WILLFUL VIOLATION is the ONLY way it can ever be extended to a Criminal court, and that is spelled out here:
Note that a defense is "not having knowledge" or not "willfully" violating a regulation authorized under the act. In fact, here’s a little tidbit from the journalists that you like to quote:
“This factor may also suggest that Waksal had no criminal intent at the time of his sales and that it all might have been handled as a civil SEC matter”
This time the journalist got close to being right. Rules are not laws; the only time a Statute operates is when a Rule is willfully violated – i.e., intent is provable.
This started out by me saying that agencies of the Federal government cannot write their own laws that are crimes; only Congress has that power. But, that willful violation of rules promulgated under authority given by Congress can make the violation of a rule a crime – and that this catenation is critical. Otherwise, it is a civil matter. And that is the reason all of the rule making agencies have their own court system – the Administrative Law courts, including the SEC.
Your rejoinder is that the 1934 Securities Act and Common Law is what makes “insider trading” a crime. I have shown you that 15 USC 2B contains only an indirect reference to such, and leaves it to the rule making capacity of the agency to define such a thing.
In general, agencies may propose rules only within the scope and bound of the enabling Statute. This is described in 5 USC Ch. 6 Sec. 601:
“the term ''rule'' means any rule for which the agency publishes a general notice of proposed rulemaking pursuant to section 553(b) of this title, or any other law, including any rule of general applicability governing Federal grants to State and local governments for which the agency provides an opportunity for notice and public comment, except that the term ''rule'' does not include a rule of particular applicability relating to rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services, or allowances therefor or to valuations, costs or accounting, or practices relating to such rates, wages, structures, prices, appliances, services, or allowances; “
And that settles it as far as I am concerned. My original understanding of the status of rules and of the powers of federal agencies remains intact. You can argue all you want that the operation of Statute converts a rule into law, but nowhere does the Code of the United States say that. It says that Statutes may designate agency rules that are to be followed, but it is the Statute itself which, when a rule violation occurs, that is referred to.
Now your understanding is to some extent an understanding which has become traditional, largely through usage, case law (as you assert) and through outright usurpation of power by federal agencies which are merely trying to see how far they can push the boundaries. This whole subject is referred to as Delegation and is quite controversial. In fact, the growth and power of the CFR has led even someone like Justice Breyer to suggest that the entirety of the CFR be introduced and adopted by the Congress, so as to legitimate it as law. His proposal includes doing this in the future with any NPRM which has an impact of > $100 million. Where he gets such an arbitrary figure, who knows. But Breyer admitted that the actual threshold value should be as small as possible without drowning Congress in mountains of proposed trivial regulations.
But I would maintain that that is what Congress was sent there to do and if they can’t consider something because of their backlog, then it should never see the light of day. Convenience is not an argument for unconstitutionally handing over legislative power to the Executive. This is something that got started under the Socialist Party platforms as adopted by the Democrats in 1932 with FDR and which has snowballed ever since.
If you’d like to read some real Conservative critiques of the Adminstrative State, go here:
Constitution.org on the Administrative State
Since your foaming-at-the-mouth advocacy of the tyranny known as the Administrative State has shown you to be anything but a Conservative, I thought that this rather well known Conservative website would be a good place for you to read some the underpinnings of the notion that FDR’s arrogation of power into the hands of the unelected and unaccountable is unconscionable and the source of the opposition that we Conservatives assert. Who knows, after reading such revolutionary notions you may even decide to flee the Democrat Party, the worship of the Judiciary and the Executive bureaucracy, and realize that much of what the Federal government does these days is quite outside the Constitution and, just because they do it anyway, still doesn’t make it right. Even if they can find a Circuit Court judge or the occasional SCOTUS “Justice” to say so.
And even though I think CATO is far too doctrinaire, they do have this rather interesting piece: Cato on Regulation
All in all, I’d say your positions are the indefensible positions of the Statists who seek to rule the country through Executive fiat, legitimated by their Fellow Travelers in the Judiciary. Beats having to run for election.
And since that seems to be your outlook, what the hell are you doing on a forum like FreeRepublic? Wouldn’t you be happier at Socialist.org – where Bony wants to be…. ? Maybe you could hum the Internationale while dreaming of writing your very own punitive regulation that would justly take the unjustly gained property of the rich! Onward to victory, Comrade! You have only your chains to lose!
See ya, Commie-Parte. Your side may have the upper hand at the moment, but nothing lasts forever, especially tyranny.
Well, sorry it took so long to get back to ya, Nappy. Had a lot of real work to do, couldn’t waste that much time on trivia. But now it’s time to respond.
But first…a little comment from a real lawyer:”Administrative law is an oxymoron”. You tell us what it means. I think it’s been my point all along.
First, let’s let one of the issue sites make a comment (“Let this sink in”): "Although properly speaking, regulations are not law, rules and regulations have the full force and effect of the law" -
Nice website. But they go a little overboard towards the end there. But the point remains…..Federal rules are not Statutes. Period. Case law since the late 1930’s has basically clarified that the Statutes can make a rule have the same weight as a Statute, but…they still cannot convert the one into the other. Sort of legal entropy if you will. You can’t go backwards.
And so there are two questions that pervaded our little back and forth…
- You assert that violations of Federal Regulations are crimes, and that agencies, like the SEC, can mete out punishment.
- You assert that “Insider Trading” is a crime by virtue of case law and SEC Rules, specifically.
To answer both of these, let’s take a little walk through the website that you linked to:
So, if they just have crimes to pursue, how come they have a law court? This isn’t a federal court:
Funny, huh? All they have is references to their Civil litigation actions they have brought, Administrative law court decisions (that’s what the ALJ Initial Decisions and Orders line is about), and other civil actions.
It appears that they do precisely what I said they do:
Note that enforcement "actions" are only against "regulated persons".
That is: "In proceedings against regulated persons, the Commission is authorized to order the payment of civil penalties as well as disgorgement"
NOTHING ABOUT IMPOSING CRIMINAL SANCTIONS. THOSE ARE REFERRED TO THE DOJ FOR PROSECUTION IN THE FEDERAL COURTS. (Let that “sink in”).
So just how do we get to a criminal court? Well, we’d have to violate a law, right? How in the world could violating a Rule be criminal – after all, I just showed you the SEC’s own enforcement division web page…and they said nothing about things like how you get to prison. Just things like how they can fine you, or take away your license…oops, all the things I said they do about 5 posts ago. So where oh where does the law come in – and not by the back door of case law like Chiarella or O’Hagen.
That’s easy. Through the United States Code – NOT the Code of Federal Regulations. You keep alluding to the 1934 Securities and Exchange Act? That is precisely what 15 USC Chapter 2B is: 15 USC 2B
If you’re reading O’Hagen or whatever, and you read someone say something like ‘This was a violation of the 1934 Securities Act’, well, what they really meant was 15 USC 2B. The long version is just how the chapter can be cited. So don’t get confused and think that the Securities Act is something special, and standing alone all by itself. It isn’t. It’s an ordinary chapter in the USC. Again, NOT the CFR.
The whole chapter is listed here:
So all of the authority for the SEC and the declarations of what is lawful and unlawful in relation to the 1934 Act therefore are contained in this chapter. All SEC regulations and case law derive their legitimacy from this Chapter. If violation of an SEC rule is to somehow be transformed into a crime, it has to come from here, because no place else does it say that in general, “rules is crimes”.
That occurs here, in a rather general way: 15 USC 78j
Didja get that part? "Insider trading" is not a Statute, but is in fact left specifically to the SEC to define as a rule! Therefore:
"Insider trading" is only "unlawful" by inference of the operation of 15 USC Chapter 2B Sec. 78j, which says that it's unlawful to violate the fraud or deceptive device or insider trading rules so adopted by the SEC under their authority.
Let’s stop right there. Didja really, really get that subtlety? The Statute says it’s against the law to violate the regulation. The regulation by itself has no authority. All of it derives from………the Statute. By itself…the rules are civil matters. When you violate Rule 10b-5, it’s only a crime because….you’re really violating 15 USC Chap. 2B Sec. 78j.
Is this really difficult for you to understand?
Note that the Civil Liability for ‘insider trading’ is actually here: 78t-1
And here is the actual penalty that is all the SEC can "impose" by itself, spelled out: 15 USC 78u-2
Note that it requires "willful violation". WILLFUL VIOLATION is the ONLY way it can ever be extended to a Criminal court, and that is spelled out here:
Note that a defense is "not having knowledge" or not "willfully" violating a regulation authorized under the act. In fact, here’s a little tidbit from the journalists that you like to quote:
“This factor may also suggest that Waksal had no criminal intent at the time of his sales and that it all might have been handled as a civil SEC matter”
This time the journalist got close to being right. Rules are not laws; the only time a Statute operates is when a Rule is willfully violated – i.e., intent is provable.
This started out by me saying that agencies of the Federal government cannot write their own laws that are crimes; only Congress has that power. But, that willful violation of rules promulgated under authority given by Congress can make the violation of a rule a crime – and that this catenation is critical. Otherwise, it is a civil matter. And that is the reason all of the rule making agencies have their own court system – the Administrative Law courts, including the SEC.
Your rejoinder is that the 1934 Securities Act and Common Law is what makes “insider trading” a crime. I have shown you that 15 USC 2B contains only an indirect reference to such, and leaves it to the rule making capacity of the agency to define such a thing.
In general, agencies may propose rules only within the scope and bound of the enabling Statute. This is described in 5 USC Ch. 6 Sec. 601:
“the term ''rule'' means any rule for which the agency publishes a general notice of proposed rulemaking pursuant to section 553(b) of this title, or any other law, including any rule of general applicability governing Federal grants to State and local governments for which the agency provides an opportunity for notice and public comment, except that the term ''rule'' does not include a rule of particular applicability relating to rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services, or allowances therefor or to valuations, costs or accounting, or practices relating to such rates, wages, structures, prices, appliances, services, or allowances; “
And that settles it as far as I am concerned. My original understanding of the status of rules and of the powers of federal agencies remains intact. You can argue all you want that the operation of Statute converts a rule into law, but nowhere does the Code of the United States say that. It says that Statutes may designate agency rules that are to be followed, but it is the Statute itself which, when a rule violation occurs, that is referred to.
Now your understanding is to some extent an understanding which has become traditional, largely through usage, case law (as you assert) and through outright usurpation of power by federal agencies which are merely trying to see how far they can push the boundaries. This whole subject is referred to as Delegation and is quite controversial. In fact, the growth and power of the CFR has led even someone like Justice Breyer to suggest that the entirety of the CFR be introduced and adopted by the Congress, so as to legitimate it as law. His proposal includes doing this in the future with any NPRM which has an impact of > $100 million. Where he gets such an arbitrary figure, who knows. But Breyer admitted that the actual threshold value should be as small as possible without drowning Congress in mountains of proposed trivial regulations.
But I would maintain that that is what Congress was sent there to do and if they can’t consider something because of their backlog, then it should never see the light of day. Convenience is not an argument for unconstitutionally handing over legislative power to the Executive. This is something that got started under the Socialist Party platforms as adopted by the Democrats in 1932 with FDR and which has snowballed ever since.
If you’d like to read some real Conservative critiques of the Adminstrative State, go here:
Constitution.org on the Administrative State
Since your foaming-at-the-mouth advocacy of the tyranny known as the Administrative State has shown you to be anything but a Conservative, I thought that this rather well known Conservative website would be a good place for you to read some the underpinnings of the notion that FDR’s arrogation of power into the hands of the unelected and unaccountable is unconscionable and the source of the opposition that we Conservatives assert. Who knows, after reading such revolutionary notions you may even decide to flee the Democrat Party, the worship of the Judiciary and the Executive bureaucracy, and realize that much of what the Federal government does these days is quite outside the Constitution and, just because they do it anyway, still doesn’t make it right. Even if they can find a Circuit Court judge or the occasional SCOTUS “Justice” to say so.
And even though I think CATO is far too doctrinaire, they do have this rather interesting piece: Cato on Regulation
All in all, I’d say your positions are the indefensible positions of the Statists who seek to rule the country through Executive fiat, legitimated by their Fellow Travelers in the Judiciary. Beats having to run for election.
And since that seems to be your outlook, what the hell are you doing on a forum like FreeRepublic? Wouldn’t you be happier at Socialist.org – where Bony wants to be…. ? Maybe you could hum the Internationale while dreaming of writing your very own punitive regulation that would justly take the unjustly gained property of the rich! Onward to victory, Comrade! You have only your chains to lose!
See ya, Commie-Parte. Your side may have the upper hand at the moment, but nothing lasts forever, especially tyranny.