There is currently a circuit split between the Ninth Circuit and the Second Circuit regarding what prosecutors are required to prove in order to obtain an insider trading conviction. In 1983 the Supreme Court issued a decision in Dirks v. Securities and Exchange Commission. In that decision the high court held an insider trading violation requires evidence that the insider disclosing the information gained something, either a direct gain or an indirect one. The Second Circuit read this requirement to mean the government is required to prove “…a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential of gain of a pecuniary or similarly valuable nature.” The Second Circuit’s reading of Dirks made successful prosecutions of insider trading violations more difficult to prove, particularly when the alleged insider is a family member or close friend.
Alternatively the Ninth Circuit focused on language in Dirks that is much more broad. The Ninth Circuit relied on language in Dirks that liability attaches when “an insider makes a gift of confidential information to a trading relative or a friend.”
The Justice Department had sought review of the Second Circuit case in 2014 when the case was decided. The Supreme Court refused to hear the case. The Justice Department discouraged the court from reviewing the Ninth Circuit’s decision – arguing review is not warranted because the Ninth Circuit decision correctly interpreted Dirks. Criminal defendants and criminal defense attorneys alike are both siding with the Second Circuit’s interpretation which justifiably makes insider trading convictions more difficult to obtain on certain sets of facts.
Insider trading prosecutions are relatively uncommon in Sacramento however as the region continues to grow and more business moves into the area such investigations and prosecutions will become more and more common. That makes the new case the high court agreed to hear important for the future of this region.