On November 10, 2014, the U.S. Supreme Court declined to hear Douglas Whitman's appeal of his August 2012 conviction on two counts of conspiracy to commit securities fraud and two counts of securities fraud. Prosecutors in the SDNY had charged Whitman, a portfolio manager at Whitman Capital, LLC, with engaging in insider trading schemes that earned his firm more than $900,000 in illegal profits. In January 2013, Judge Jed Rakoff sentenced Whitman to 24 months in prison.
In his appeal to the Supreme Court, Whitman noted that the lower court, applying Second Circuit law, held that there is no "causation" element for the offense of insider trading under § 10(b). As a result of this holding, Whitman argued, the court did not require the prosecutors in his case to prove that the inside information he allegedly possessed was actually a motivating factor in the challenged trades. Whitman argued that this "holding, unique to the Second Circuit, conflicts directly with opinions of other circuits, and it is contrary to both the text of the statute and this Court’s precedents." He added that the lack of any causation requirement in the Second Circuit "rendered the Second Circuit a haven for securities prosecutions, allowing the government to secure convictions—like petitioner’s—that could not have been obtained elsewhere...."
The Supreme Court denied Whitman's appeal, allowing the conviction to stand. In a separate statement accompanying the denial by Justices Antonin Scalia and joined by Justice Clarence Thomas, Justice Scalia wrote that the appeal raised an important related question: "Does a court owe deference to an executive agency’s interpretation of a law that contemplates both criminal and administrative enforcement?"
Justice Scalia wrote that the Second Circuit had deferred to the SEC's interpretation of §10(b) and on that basis had affirmed Whitman’s criminal conviction. He observed, however, that while "Congress may make it a crime to violate a regulation ... it is quite a different matter for Congress to give agencies—let alone for us to presume that Congress gave agencies—power to resolve ambiguities in criminal legislation." (citations omitted).
Moreover, Scalia added, the "rule of lenity" requires interpreters to resolve ambiguity in criminal laws in favor of defendants, not the government. Equally important, he said, this rule "vindicates the principle that only the legislature may define crimes and fix punishments. Congress cannot,through ambiguity, effectively leave that function to the courts—much less to the administrative bureaucracy."
Justice Scalia wrote that he ultimately agreed with the Supreme Court's decision to deny Whitman's appeal because Whitman did not appeal on the issue of deference, "But when a petition properly presenting the question comes before us," he concluded, "I will be receptive to granting it."