Picturing Lee Jones lobbying hard.

Baazov took $1 million in 2015 but interim CEO earned twice that sum

Insider trading presents a unique legal issue. There is no precise federal law that prohibits insider trading explicitly. Initially insider trading was prosecuted under anti=fraud statute. And the courts based this expansive reading of the law in 2 conflicting legal theories. One is "fraud on the market" whereby insider trading somehow undermines the market itself. This has been largely rejected. It has been replaced by a doctrine premised on the breach of a fiduciary duty and the exchange of something of benefit or a "quid pro quo" so to speak.

The "laws" that prohibit insider trading are actually regulations issued by the SEC and then interpreted by the judiciary.

Clearly when a real insider trades on material non public info he is violating his duty to the company. That is the legal justification for the prosecution.
If I as private individual over hear the CEO discussing nonpublic info and trade on it, I am not committing a crime.

In fact, the federal courts have recently ruled that if the CEO tells me nonpublic info but expects nothing in return and I trade on this info neither of us have committed a crime.

So the argument that the counter-party to a trade based on insider info is harmed is one that is rejected by the legal community. Surely, investors are harmed daily when some market players have better presumably "public" info with which they trade on. Hedge funds routinely higher corporate managers as "consultants", but who essentially provide non public info for a fee. A huge industry operates around this practice. In fact, the feds had trouble prosecuting a case with SAC capital based on this practice that supposedly was "misused."

So legally in the US insider trading is based on the breach of a fiduciary duty to the owner of the insider info. The fraud on the market theory has been abandoned legally and economically.

^ Interesting. In the UK it's specifically made illegal in statute law so I'm not sure the reasons have ever been set out explicitly.

A lot of this is entirely incorrect with respect to Canadian law -- specifically the theory that insider trading undermines the public confidence in the markets is still the relevant doctrine, and one cited explicitly by the AMF in its case against Baazov and others.

First, my post had nothing to do with Canadian insider trading laws. There are a multitude of laws both federal and provincial which govern the securities markets. The Business Corp Act specifically deals with the relationship between the insider and corporation and how the misappropriation of inside info injures the company.

Second, I never said that US insider trading regs are not at least partially motivated by an attempt to instill confidence in the markets. That is clearly motivating the SEC. But there is no legal justification to put someone in jail because their actions simply undermine confidence in the markets. A person must commit a "crime." And in the US and common law nations, the crime must involve a mens rea, that is criminal intent. Obviously, it is not legally justified to simply criminalize any action that undermines the confidence of the securities markets. Who determines whether the confidence has been undermined? And who determines what that confidence level is?

That was the purpose of my post. To remind people that the legal system has long sought a proper legal justification for the criminal insider trading laws. Modern law has settled on the Misappropriation Theory, whereby the insider is essentially stealing privileged info, a valuable commodity in and of itself. But as I mentioned earlier, the judiciary has required that a higher level of mens rea must be proved in order to convict a Tipper or a Tippee who is not in a fiduciary relationship with the company.

In the end, canadian criminal insider trading law is not much different.

Yea, insider trading is not bad for the market, in fact it makes the market more efficient and trustworthy. It ensures that stock prices trade closer to their true values and provides valuable information on frauds. Criminalizing it is just another aspect of criminalizing commercial disputes so that companies can use government resources to enforce their rules.

In the US the SEC has always tried to assert the broadest possible definition of insider trading. One assertion they've made in the past is that you are guilty of insider trading even if you don't work for the company and came by your inside information without committing any illegal acts. For example if you were driving by Tesla's main plant and see it explode, and immediately short the stock, the SEC historically would claim that's insider trading because you were in possession of material information (i.e.. important to the value of the company) that was non-public, at least for the 15 minutes you knew it before CNBC broadcast it.

That's clearly ridiculous and bad for investors. Anyone who was buying Tesla in that 15 minutes before the CNBC report was massively overpaying, your shorting of the stock helped drive it down to it's "true value" and made their purchase price fairer. The SEC gets it's nose bloodied by the courts all the time trying to push this expansionist agenda, not sure how hard they push their insider trading agenda nowadays anymore to be honest.

EDIT: Even better what I'd like to see is allowing all company employees to make insider trades as long as they publicly announce what they are doing, say a day in advance. If you know the CEO of a company is planning to sell a million shares tomorrow, then you have super valuable information, even if you don't know the material non-public information they know.

If companies or the exchanges want something more restrictive than that, they can require key employees to sign no-trade agreements, and sue them if they violate them.

Voila, suddenly the ineffectual SEC frees up a bunch of resources to investigate frauds and ponzi schemes, which it barely does right now. Better all around for everyone.

I essentially agree. The problem is Congress has not really written a comprehensive insider trading law. The courts in the last few years have reigned in SEC overreach and the prevailing doctrine is the Misappropriation theory. That is when actual insiders use inside info. This goes against all the fiduciary duties that a corporate officer must adhere to.

The grey area is where outsiders come into inside info without bribing or co-opting an insider. As you said, the SEC attempted to criminalize any use of non public material info, no matter how it is obtained. The courts have ruled that for such info to be criminal, there must be some quid pro quo or exchange of benefits. This seems the appropriate standard.

But I do not think insiders should be permitted to trade on inside info. It is clearly a tort, or violation of one's fiduciary duty. And it does undermine confidence in the markets.

conlaw's posts are quite muddled :/

Baazov's facing a charge of aiding and abetting, not insider trading - think he's being charged with breaching his fiduciary duty to shareholders, by disclosing privileged info without making it available to everybody.

The easiest way to get an idea of existing law might be to flip through this report from the AMF - was only able to find the 2010 version, but here it is:

http://www.lautorite.qc.ca/files/pdf...eport10-en.pdf

i was not addressing Baazov's arrest. The discussion was about the merits if insider trading laws. (please read the posts that I replied to)

But if one is charged with aiding and abetting, then the crime is essentially the same as the underlying offense. In fact, normally the level of criminal intent required is higher in an aiding and abetting chg.(at least in the US and most common law nations).

Other than that, my posts are dead on regarding the laws in the US and Canada regarding insider trading criminal violations.

You're understanding's not incorrect per se, but it does seem a bit muddled.

For example, saying that aiding is basically the same as insider trading - the punishments for both might be about the same. But the elements are different, which is why they're considered different crimes.

Just wanted to chime in, because this thread was really starting to go off on a tangent.

Aiding and Abetting itself is not a crime at least in the US. Aiding and abetting a particular crime requires the suspect to have the specific intent to commit the underlying crime. In almost all cases, that is a higher level of intent than is required to convict someone of the underlying offense. Therefore, it is normally more difficult to convict a person of A&A than it is to convict them of the underlying offense.

Now I assume that principle holds in Canada it being largely a common law system except for the French areas.

Do you have any citations to cases or authority for these statements from your post, (which are quite interesting if accurate):

1." One is "fraud on the market" whereby insider trading somehow undermines the market itself. This has been largely rejected."... So legally in the US insider trading is based on the breach of a fiduciary duty to the owner of the insider info. The fraud on the market theory has been abandoned legally and economically"

2. " In fact, the federal courts have recently ruled that if the CEO tells me nonpublic info but expects nothing in return and I trade on this info neither of us have committed a crime.
"

Seriously, you may have taught us something, I had thought that undermining public confidence in a fair market was a "live" policy reason for prohibiting insider trading. Sort of like how allowing two players at a table to flash each other cards would undermine confidence of the public in a fair poker industry.

It's been a while since I finished school, so this'll be really interesting to see what case law he cites - it does seem possible his citations of law *might* be accurate ... but his understanding/application seems a bit confused ...

There is no juice in hell, but a lot more on PS latey

For number 2, the groundbreaking case is U.S. v Newman.

For Number 1- the cases that track this evolution in the law are Chiarella and O'Hagan. Chiarella stands for the principle that common law fraud principles underpin insider trading laws and not the "fraud on the market" theory. The fraud on the mkt theory prevailed earlier in the evolution of the insider trading case law. Chiarella ended that essentially. It held that it is was one's fiduciary relationship with the company from which the crime of insider trading grew out of.

Now, I am sure the SEC's policy reason is confidence in the markets. Congress has never passed an explicit insider trading statute. The SEC has issued regulations that have the effect of law under its authority. That authority derives from the Securities Act of 1933-Section 10b.

The courts were forced to find a legal justification for these criminal laws that did not emanate directly from Congressional action. Initially "fraud on the market" doctrine emerged. Later, the Supreme Court in Chiarella and subsequent cases, narrowed the scope of the SEC's criminal power by anchoring insider trading laws to common law fraud principles that are contained in the Securities Act of 1933.

In Chiarella, an employee of a printing company that printed corp. docs came into non public info in the course of his job. He then traded on that non public info. The Supreme Court held this was not criminal because the insiders/company voluntary disclosed that data for a legitimate purpose. That is they did not violate their fiduciary duty. And the printing employee had no confidential or fiduciary relationship with the company and thus his failure to disclose his trading was not a crime under the anti-fraud provisions of section 10b of Securities Act.

Brooklyn Law review

This is the reason there are two distinct doctrines or policies that underpin U.S. insider trading laws. Certainly the SEC is motivated by market confidence. However, legally one cannot define a crime in that context. One needs to prove criminal intent. Thus, since Congress was silent, the judiciary developed the doctrine from common law fraud principles. Under that reasoning, when one knowingly violates a fiduciary duty to the company and receives some material benefit from this intentional breach, one misappropriates the confidential info from the company. This is the crime. The tipper/tippee cases which Newman addresses, also require that one receiving inside info knows that it derives from an insider who has breached his fiduciary duty and that the insider was promised some material benefit in return for the data.

Thus, since Newman, it is clear that merely coming into possession of material non public info and trading on it is not in and of itself a crime. As long as the recipient did not induce an insider to breach a duty and as long as the recipient does not know or have reason to know that the source of the info did induce the insider to breach, the recipient is NOT guilty of insider trading if he or she then trades on that non-public info.

There must be a breach of a duty between the recipient of the info and some other party to constitute a crime. That breach has been defined as either a breach of a fiduciary duty by an insider to the company itself, or the inducement of an insider's breach by an outsider and recipient of the data, or the misappropriation of confidential information from a party to whom one has a special confidential relationship (Misappropriation Theory)-applies to law firms working on a Merger, but not to employees of a printing company (Chiarella) that are printing confidential corporate data.

Having trouble finding a copy of Chiarella v. United States - 445 U.S. 222 (1980)

But here's US v Newman: http://www.scotusblog.com/wp-content...7-op-below.pdf

And here's US v O'Hagan: https://supreme.justia.com/cases/fed.../642/case.html


Am just getting started reading them, but the latter 2 cases are just holdings from the US District Courts of Appeals (2nd, and 8th) - so they wouldn't be the law of the land ...

And the Wikipedia page for Chiarella v. US makes it sound like the US Sup. Ct. was only reviewing whether the printer had a duty to disclose the privileged info - it also says that he was required to return the profits he gained from trading on privileged insider info ... (still reading though to confirm if that got overturned) ...

Wrong! O'Hagan is a Supreme Court case and is the law of the United States.(the link to the case is a Supreme Court case:521 U.S. 642 (1997))

Newman is the law of the land for the 2nd Circuit of the United States. This includes Wall Street and almost all major securities law cases. Hence it is binding in the 2nd Circuit and for an crimes committed in New York State, on any of the New York exchanges etc. and persuasive authority in the rest of US in the unlikely even they prosecute an insider trading case.

Wow! Wikipedia is not known for its legal authority. I haven't read the wikipedia entry, but if that's what it says its wrong. The duty to disclose refers to the duty to disclose that one is trading on the inside info. And that duty arises when either one is an insider with a fiduciary duty to the company, the owner of the data, or when one is in a confidential or special relationship with the lawful holder of that data, like a law firm or investment bank advising a company.(See O'Hagan)

A cursory reading of Chiarella reveals this quote:
I mean this is right on the first few pages. And it clearly states the foundations of US insider trading law. Not sure what you are reading.

And Chiarella did NOT get overturned, my friend. It is landmark securities law case that is taught in law school. And your cursory reading is way off mark.

Here is a quote from US v. Newman (2nd Cir 2013)

This encapsulates exactly what I have been saying. And Chiarella defined this securities fraud as a breach of one's duty to the company. Insider trading by an insider is legally the same as if an insider stole a corporate opportunity from the company, (i.e buys a building or patent knowing the company is planning to and then selling it to the company at a higher price. This is illegal b/c the insider does NOT disclose his plans to the company. Not the transaction itself)

O'Hagan expanded this duty to lawful holders of the info outside of the company and those in a confidential or fiduciary relationship to that secondary info holder, such as a law firm, investment bank. (Theoretically this could include printer company employees but no such case has ever been decided by the SC since Chiarella)

Newman speaks to this, however, because it requires in all cases that there be criminal intent or a quid prop quo. That is the recipient and source, or tipper and tippees must know that a breach of duty occurred in the source chain of the inside info. The tippers and tippees must also exchange something of benefit in exchange for the inside info. Thus, Newman stands for the premise that simply using inside info to trade and make money is not in and of itself a crime. The user of the info must have either induced a breach of a duty by bribing a corporate insider or other derivative holder of the info like a law firm or bank, or paid for the info to some other source of the info while knowing that that source somehow induced a breach of a duty in order to obtain the inside information.

The legal doctrine is complex and nuanced. It is not premised on confidence in the markets. That is surely the motivation of the SEC and Congress when it wrote the 1933 Securities Act. But the legal justification for holding someone guilty of crime is derived from common law fraud principles and the breach of a fiduciary duty in order to profit or gain. The breach occurs when one trades or exploits the data without disclosing the trades to the company, or when one misappropriates the data from secondary holder of the data such as a law firm or investment bank where the recipient or misappropriator is in a confidential relationship with that other entity.

So, not sure what your point is.

The last paragraph sounds basically correct - the rest sounds like a bit of a stretch ...

It looks like Chiarella stands for the idea that while corporate insiders have a duty to either 'disclose or refrain' (disclose insider info before trading, or refrain from trading on insider info), mere possession of insider info does not give rise to that duty.

It didn't look like the Court went as far as to say that if there was no duty there was no fraud, although they did overturn his conviction. In fact, Powell acknowledges that the trade was unfair.

If anything this case seems to reaffirm that trading on non-public info by corporate insiders is act of fraud against buyers/sellers, who need to be able to rely on insiders to play by the rules. The Court just didn't think this printer rose to the level of insider, merely because he came into possession of inside info.

-

conlaw's starting to sound like PocketDucks - weird interpretations, walls of text trying to justify his weird interpretations, no concern for thread derails, etc.

It's starting to feel like this thread's becoming more about conlaw, instead of Baazov - so I don't want to encourage the derail by posting any more :/

Wrong! Possession of the Info is what gives rise to the data. Insiders can trade and have no duty to disclose if the have no inside data.

In addition, in your prior post you claimed Chiarella held (from Wikipedia)

So that is wrong.

Unfairness has nothing to do with it. And your citation of that reveals your misunderstanding of the law. O'Hagan and Chiarella EXPLICITLY state that if there is no breach of duty there is no fraud and hence no crime of insider trading:

Here is Chiarella:
This is crystal clear.
Chiarella knowingly possessed inside info by reading the printing materials at his job and traded on that info. But he was NOT guilty of a crime because he had no duty to the printing company or the actual company from which the data came from.

You cannot be more wrong. Your reasoning is absurd. If the printer in your view defrauded public buyers and sellers by trading on inside info, then why didn't the court hold liable for insider trading?

What is the import of Chiarella then? How can it be consistent with your claim the fraud in on the buyers and sellers if Chiarella defrauded the marketplace of buyers and sellers yet was not guilty of insider trading?


The quotes from Chiarella and Newman explicitly state the reasoning:

Newman:
Rule 10b-5 and common law fraud are all premised on breaches of the applicable fiduciary duty that are caused by some material gain or inducement.

Chiarella:
Not sure what you cannot read here.

Hence no crime since there was no duty.
And O'Hagan which is A Supreme Court case:
The breach is to the Source of the Info. Not the marketplace or the individual shareholders who may have bought or sold the securities..

This is basic law school material.

You have been wrong about:
1. Whether O'Hagan was Supreme Court case.
2. That Chiarella the duty was to disclose the inside info-It is the opposite. One's duty is to keep the info Private and Confidential.
3. That Newman is not applicable law-Federal Appellate Court decisions are the law of the land for the district they sit. It is persuasive authority for other districts.
4. That the legal doctrine governing insider trading laws is "Market confidence and fairness."

What is it that you have been correct about?

Then once you apologize to the thread and me for both derailing the thread and for misstating the facts, then I think we all can move on.

Your statements regarding the law are flat out wrong. You are either incapable of reading the legal nuances of the cases, or intentionally misstating the facts. Either way, you are under a duty to refrain from knowingly misstating the law.

Do you realize you're not in your lawschool here ?
Do you realize nobody cares about the cases you're talking about and how you post them only to prove your point, which is a complete derail of the thread ?
If you got news on BAAZOV's case, feel free to share, but to argue about some old cases just to speculate on what happens on Baazov's case is just pure derailing troll.

Lawyers are not pleasant people. Just ask my wife.