Having already left his mark on how the SEC handles settlements, U.S Judge Jed Rakoff now appears to be focused on another key securities enforcement issue: the definition of insider trading.
In U.S. v. Newman, the Second Circuit dramatically limited the ability of the SEC and the DOJ to pursue certain insider trading cases. The December 2014 opinion in Newman, which has already led Congress to introduce no fewer than three pieces of legislation seeking to define insider trading, has also prompted some interesting responses from Judge Rakoff.
On April 6, 2015, Judge Rakoff became one of the first district court judges in the Second Circuit to rule in an insider trading case post-Newman in SEC v. Payton. In that case, the judge denied a motion to dismiss an SEC lawsuit filed by two former brokers, Daryl Payton and Benjamin Durant, who argued that the case should be dismissed based on the holding in Newman.
In denying the motion to dismiss, Judge Rakoff emphasized the difference between a criminal case brought by the DOJ and a civil case brought by the SEC:
Specifically, while a person is guilty of criminal insider trading only if that person committed the offense "willfully," i.e., knowingly and purposely, a person may be civilly liable if that person committed the offense recklessly, that is, in heedless disregard of the probable consequences. With respect to the motion here pending, that distinction arguably makes a difference.
In this case, Judge Rakoff found, the SEC had sufficiently met the lower standard of alleging that the defendants had at least "recklessly disregarded" that the tipper in their case had breached a duty of trust and confidence to the owner of the inside information. Accordingly, the court denied the defendants' motion to dismiss.
The next week, Judge Rakoff revisited this issue in an April 17 speech he delivered at an event hosted by the New York University School of Law. According to Law360, Judge Rakoff suggested that
... it might make more sense to have two definitions, or even two laws — one on the criminal side narrowly and specifically defining core criminal insider trading and the other on the civil side broadly defining insider trading in a way that leaves room for future development.... This would prevent criminal prosecution of those who lacked fair notice of their transgressions, while allowing the SEC to step in and halt new, innovative forms of insider trading at the outset.