A panel led by former federal prosecutor Preet Bharara urged Congress to clarify the law surrounding insider trading, to make it less confusing for traders, judges and regulators.
The biggest problem is the absence of a statute that specifically criminalizes insider trading, the panel said in a report released Monday. Prosecutors and regulators instead are forced to apply decades-old anti-fraud laws and shifting court interpretations.
“There’s a continuing need for clarity and certainty,” said Joon Kim, a member of the panel who succeeded Bharara after his firing by President Donald Trump in March 2017. “There should be a law that’s specific to insider trading.”
The group proposed a new statute expressly setting out the elements of an insider-trading offense that bars trading on information that is “wrongfully” obtained or passed along to traders. The law should eliminate “personal benefit,” a court-made rule that requires that prosecutors prove the source of a tip violated a duty to keep it secret in exchange for money or some other benefit, the panel said.
The eight-member task force included Bharara, who was U.S. Attorney for the Southern District of New York; Kim, now in private practice at Cleary Gottlieb Steen & Hamilton; U.S. District Judge Jed Rakoff; Columbia Law professor John C. Coffee Jr.; and Stanford Law professor Joseph A. Grundfest, a former commissioner at the Securities and Exchange Commission.
A 2019 bill, “The Insider Trading Prohibition Act,” passed the U.S. House of Representatives last month in a 410-13 vote and is pending before the Senate. It includes “several important improvements” over current law, the panel said. But the bill differs with the panel’s recommendation by including the personal-benefit requirement.
That provision is the subject of numerous court rulings, including a 2014 decision by the federal appeals court in New York throwing out insider-trading convictions of fund managers Todd Newman and Anthony Chiasson.
The court last month made life easier on prosecutors, upholding the insider-trading convictions of a Washington political consultant and three others. The court said prosecutors don’t have to prove personal benefit when charges are brought under the 2002 Sarbanes-Oxley Act, but it must still be proved when charges are based on the 1934 Securities Exchange Act, according to the court.
“It’s been the source of more than its share of confusion,” Kim said.