WASHINGTON, D.C. – Congressman Stephen F. Lynch (D-MA) recently introduced H.R. 1173, the Ban Insider Trading Act of 2015. This legislation would establish a clear-cut insider trading statute that makes it a federal crime to purchase or sell securities based on material insider information.
Currently, insider trading is not a specific crime under federal law. Rather, the federal government must routinely prosecute insider trading cases under more general anti-fraud laws and by relying on a string of federal court decisions, dating back to the 1960s, that have left insider trading law subject to vague and differing interpretations by judges. Most recently, in December of 2014, the U.S. Court of Appeals for the Second Circuit in U.S. v. Newman overturned the convictions of two Wall Street hedge fund portfolio managers while significantly narrowing the scope of what makes insider trading a crime. In particular, the Newman Court found that in order for insider trading to be illegal, the corporate insider must first receive some personal tangible benefit, such as money, in exchange for providing the inside information. As noted by the Department of Justice in its petition for a rehearing of the case, the Newman Court’s severely limited interpretation of what constitutes illegal insider trading will significantly obstruct federal efforts to combat and prosecute even the most common forms of insider trading.
“In the wake of the ill-advised Newman decision, it is important that Congress enact a robust insider trading statute that unequivocally defines insider trading as a federal crime,” said Congressman Lynch. “Also by prohibiting the use of material inside information outright, the Ban Insider Trading Act of 2015 will better safeguard the integrity of our markets by protecting powerful information from being abused at the expense of average investors. It is obvious from the Newman case that we need clarity in this area in order to create a bright-line distinction between what is permissible and prohibited. At a time where stock trading has become increasingly defined by the use of high-volume electronic trades involving complex algorithms and computer programming which can make it easier to hide illicit trades, H.R. 1173 will provide a critical law enforcement tool to prosecute insider trading-related offenses,” added Lynch.
Specifically, H.R. 1173, the Ban Insider Trading Act of 2015 would establish that it is a federal crime to purchase or sell any security based on information that the individual knows or should know is material inside information. Pursuant to H.R. 1173, the factors used to determine whether an individual should know include financial sophistication, knowledge of and experience in financial matters, position in a company, and amount of assets under management. The legislation would also hold a person liable for insider trading if they intentionally disclose material information without a legitimate business purpose.
The text of the legislation is available here.