Earlier this month, a federal jury in Atlanta acquitted hedge fund manager Steven Slawson on all 34 counts he faced as the "tippee" in an alleged insider trading scheme. While the case made headlines briefly because of the rarity of an acquittal in a criminal insider trading case, a potentially more notable aspect of the case was flagged this week by Professor Peter J. Henning in his White Collar Watch column in the NYT's DealBook.
Henning observed that federal prosecutors in Slawson pursued their insider trading case not under Section 10(b) of the Securities Exchange Act of 1934 -- which is the norm -- but rather under a far more obscure securities fraud statute. Prosecutors alleged that Slawson violated 18 U.S.C. § 1348, a provision of the Sarbanes-Oxley Act.
Why this change in strategy? As discussed here numerous times, the government's insider trading prosecutions of tippees have been significantly disrupted by the Second Circuit's decision in U.S. v. Newman. In short, Newman requires the government to show that the tippee knew that his or her tipper received a benefit. Specifically, Newman requires proof of "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” This heightened level of proof of a benefit has proven fatal to many recent prosecutions -- and apparently led prosecutors in the Slawson case to try the "Plan B" approach of charging Slawson under Section 1348 rather than Section 10(b).
Section 1348 ("Securities and commodities fraud") states that
Whoever knowingly executes, or attempts to execute, a scheme or artifice—
(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d)); or
(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d));
shall be fined under this title, or imprisoned not more than 25 years, or both.
Henning writes that in support of their case, the prosecutors in Slawson argued that Section 1348 does not require proof that the tippee knew of a benefit being passed to the tipper, but rather
was intended “to enable prosecutors to reach a greater array of securities-related misconduct, and to enable the government to avoid the technical complexities and nuances of the traditional securities laws that were often exploited by defendants and their lawyers.” In other words, the benefit requirement imposed by the Supreme Court in the Dirks case no longer applies because Congress adopted Section 1348 to “avoid” such cumbersome requirements.
Notably, the trial court agreed with the government's reading of Section 1348, and did not instruct the jury that it must find that Slawson knew that the tipper received a benefit in exchange for the information in order to find Slawson guilty. Despite that key ruling in favor of the government, the jury still acquitted Slawson on all counts.
Slawson's acquittal means that the correct standard to apply in insider trading prosecutions under Section 1348 will need to be addressed in a different case. According to Henning, that could come in another insider trading case federal prosecutors in Atlanta have filed under Section 1348 for trading in a company called Chattem prior to an acquisition in 2009.