1 00:00:00,080 --> 00:00:03,400 Speaker 1: New York federal prosecutors are making a comeback in their 2 00:00:03,400 --> 00:00:07,360 Speaker 1: fight against insider trading. Not only will the former portfolio 3 00:00:07,480 --> 00:00:10,959 Speaker 1: manager convicted in the most lucrative insider trading case ever 4 00:00:11,280 --> 00:00:13,600 Speaker 1: have to serve out the rest of his nine years sentence, 5 00:00:13,880 --> 00:00:16,360 Speaker 1: but the Manhattan Federal Appellate Court has lowered the bar 6 00:00:16,480 --> 00:00:20,239 Speaker 1: for convictions for insider trading. Former S A C Capital 7 00:00:20,280 --> 00:00:24,880 Speaker 1: Advisers portfolio manager Matthew Martoma lost a bid to overturn 8 00:00:24,960 --> 00:00:28,440 Speaker 1: his insider trading conviction for using illegal tips to make 9 00:00:28,480 --> 00:00:31,240 Speaker 1: two hundred seventy five million dollars for S A C 10 00:00:32,040 --> 00:00:34,440 Speaker 1: by a two to one vote. The second circuit widened 11 00:00:34,440 --> 00:00:37,479 Speaker 1: the category of people who can potentially be prosecuted for 12 00:00:37,520 --> 00:00:41,200 Speaker 1: insider trading. More than a dozen insider trading cases fell 13 00:00:41,240 --> 00:00:45,479 Speaker 1: apart in the wake often decision by this same court. 14 00:00:45,760 --> 00:00:48,720 Speaker 1: So where does the law stand now Here to discuss 15 00:00:48,800 --> 00:00:51,200 Speaker 1: that are two experts in this area of the law, 16 00:00:51,320 --> 00:00:54,880 Speaker 1: John Coffee of Professor at Columbia Law School and Robert Hockett, 17 00:00:54,920 --> 00:00:59,080 Speaker 1: Professor at Cornell University Law School. John, the question of 18 00:00:59,080 --> 00:01:01,720 Speaker 1: what has to be proven in an insider trading case 19 00:01:01,800 --> 00:01:03,880 Speaker 1: has gone all the way up to the Supreme Court, 20 00:01:04,400 --> 00:01:07,720 Speaker 1: so take us on a short journey to explain where 21 00:01:07,720 --> 00:01:10,920 Speaker 1: it stands fair enough, and it really does change the 22 00:01:10,959 --> 00:01:15,000 Speaker 1: law significantly to favor the prosecution. Prior to this case, 23 00:01:15,480 --> 00:01:20,120 Speaker 1: the Supreme Court, both in its Dirk's decision back and 24 00:01:20,160 --> 00:01:22,960 Speaker 1: in the Solomon decision that it handed down last year, 25 00:01:23,400 --> 00:01:27,320 Speaker 1: both emphasized that the prosecution had to prove not simply 26 00:01:27,440 --> 00:01:32,000 Speaker 1: that the defendant used material and non public information to trade, 27 00:01:32,600 --> 00:01:37,640 Speaker 1: but that the tipper had received some personal benefit from 28 00:01:37,720 --> 00:01:42,160 Speaker 1: the tippy. Other words, that was distinguishing between mere gossip 29 00:01:42,400 --> 00:01:44,880 Speaker 1: and a kind of predatory theft where you bribed an 30 00:01:44,920 --> 00:01:49,080 Speaker 1: insider to get the information from the company. They recognized 31 00:01:49,120 --> 00:01:52,280 Speaker 1: also both those decisions that there could be a special exception, 32 00:01:52,560 --> 00:01:55,720 Speaker 1: a gift by an insider to his relatives or close friends. 33 00:01:56,240 --> 00:02:00,320 Speaker 1: That seemed like a small case. What's now happened is that, 34 00:02:00,440 --> 00:02:04,160 Speaker 1: even after Dirk's and Solmon, the Martoma decision handed down 35 00:02:04,320 --> 00:02:09,079 Speaker 1: yesterday says that any time information is given to anyone 36 00:02:09,320 --> 00:02:11,840 Speaker 1: who is likely to trade based on it, but you 37 00:02:11,919 --> 00:02:15,040 Speaker 1: expect will trade based on it, that will be treated 38 00:02:15,080 --> 00:02:17,920 Speaker 1: as a gift. The prior case law, or at least 39 00:02:17,919 --> 00:02:21,320 Speaker 1: the Newman decision in the Second Circuit had said that 40 00:02:21,440 --> 00:02:24,320 Speaker 1: it's only when you gave information to someone with whom 41 00:02:24,320 --> 00:02:28,320 Speaker 1: you had a meaningful close relationship that's gone. Now it 42 00:02:28,320 --> 00:02:30,880 Speaker 1: could be a casual acquaintance. It can be anyone that 43 00:02:30,960 --> 00:02:33,119 Speaker 1: you know if you have a reason to believe they're 44 00:02:33,160 --> 00:02:36,480 Speaker 1: likely to trade on this information. So we will have 45 00:02:36,800 --> 00:02:39,920 Speaker 1: the prosecution using a totally different theory, never having to 46 00:02:39,960 --> 00:02:42,320 Speaker 1: prove a personal benefit, but just saying this was a 47 00:02:42,360 --> 00:02:47,079 Speaker 1: gift of information and therefore they are liable. Go ahead, well, 48 00:02:47,320 --> 00:02:52,840 Speaker 1: tell us about Martoma's appeal. Well, the appeal is essentially 49 00:02:52,919 --> 00:02:56,240 Speaker 1: based on the change in the law that John just mentioned, right, So, 50 00:02:56,320 --> 00:03:00,120 Speaker 1: at the time that the original conviction was one, the 51 00:03:00,200 --> 00:03:03,520 Speaker 1: jury was instructed to make its decision on the basis 52 00:03:03,560 --> 00:03:06,200 Speaker 1: of the law as it then stood. So what we 53 00:03:06,280 --> 00:03:09,240 Speaker 1: have now is the destendant arguing that, well, you know, 54 00:03:09,560 --> 00:03:13,240 Speaker 1: the law has actually changed during the course of his 55 00:03:13,400 --> 00:03:16,679 Speaker 1: appeal from the earlier decision, and that therefore, since the 56 00:03:16,760 --> 00:03:19,400 Speaker 1: law has changed during the course of that appeal, there 57 00:03:19,400 --> 00:03:21,520 Speaker 1: should be a new trial with a new jury that 58 00:03:21,560 --> 00:03:23,840 Speaker 1: will be instructed to pursue it to the dictates of 59 00:03:23,919 --> 00:03:30,720 Speaker 1: the new law. John, the majority opinion noted that it 60 00:03:30,800 --> 00:03:33,320 Speaker 1: was rare to take issue with the precedent set by 61 00:03:33,400 --> 00:03:36,560 Speaker 1: another panel in its circuit, but that it was necessary 62 00:03:36,600 --> 00:03:40,080 Speaker 1: because of the Supreme Court's ruling in Salmon. Does this 63 00:03:40,400 --> 00:03:44,440 Speaker 1: totally undercut the prior Newman decision. I don't think there's 64 00:03:44,480 --> 00:03:48,200 Speaker 1: anything really left to Newman after this result. In theory, 65 00:03:48,240 --> 00:03:50,720 Speaker 1: there's still going to be a personal benefit the jeff 66 00:03:50,800 --> 00:03:53,000 Speaker 1: to show in cases where there's not been a gift, 67 00:03:53,280 --> 00:03:56,720 Speaker 1: but the prosecution can always see we characterize this as 68 00:03:56,760 --> 00:03:59,760 Speaker 1: a gift and have a much simpler burden of proof. 69 00:03:59,760 --> 00:04:03,320 Speaker 1: It is hard to show that the tippy gave something 70 00:04:03,360 --> 00:04:05,600 Speaker 1: of value or knew that someone earlier in the chain 71 00:04:05,640 --> 00:04:08,440 Speaker 1: of tips gave something of value to the tipper. That 72 00:04:08,480 --> 00:04:11,920 Speaker 1: requirement is now gone. But at the same time, we're 73 00:04:11,920 --> 00:04:16,000 Speaker 1: no longer distinguishing casual gossip from a kind of predatory 74 00:04:16,120 --> 00:04:19,080 Speaker 1: bribe page to get information from the company. So it 75 00:04:19,200 --> 00:04:21,880 Speaker 1: is a significant change in the scope of the criminal law, 76 00:04:22,240 --> 00:04:25,200 Speaker 1: and for those who fear over criminalization, this is going 77 00:04:25,240 --> 00:04:31,120 Speaker 1: to be a concern to them. Bob Judge Rosemary Pooler dissented. 78 00:04:31,320 --> 00:04:34,520 Speaker 1: What was her reasoning? Well, she had a couple of 79 00:04:34,520 --> 00:04:37,000 Speaker 1: reasons that she gave, but the one that she seems 80 00:04:37,000 --> 00:04:40,599 Speaker 1: to have laid most emphasis on was precisely this change 81 00:04:40,880 --> 00:04:44,200 Speaker 1: in standard that Jack's emphasize. So she says that, look, 82 00:04:44,360 --> 00:04:48,400 Speaker 1: all right, given that a gift is enough, and given 83 00:04:48,440 --> 00:04:51,560 Speaker 1: that this sort of conceptual boundaries you might say of 84 00:04:51,640 --> 00:04:55,400 Speaker 1: the idea of a gift are fairly poorous, fairly open ended. 85 00:04:55,520 --> 00:04:57,680 Speaker 1: In other ways, given the fact that many things can 86 00:04:57,720 --> 00:05:02,080 Speaker 1: be characterized as gifts are less plausibly, we're likely to 87 00:05:02,120 --> 00:05:05,120 Speaker 1: have a rather significant widening or opening up of the 88 00:05:05,160 --> 00:05:09,080 Speaker 1: door to potential liability. She thinks, in other words, that 89 00:05:09,160 --> 00:05:12,360 Speaker 1: there is now a very significant danger of over criminalization, 90 00:05:12,600 --> 00:05:14,839 Speaker 1: as Jack put it. Now, of course, if you don't 91 00:05:14,960 --> 00:05:18,040 Speaker 1: worry about over criminalization, but in the wake of the crisis, 92 00:05:18,160 --> 00:05:21,960 Speaker 1: say you worry about under criminalization or under enforcements or 93 00:05:22,160 --> 00:05:25,040 Speaker 1: you know, sort of insufficient incentives to dissuade people from 94 00:05:25,040 --> 00:05:28,080 Speaker 1: engaging in chicanery in the financial markets, then of course 95 00:05:28,120 --> 00:05:31,320 Speaker 1: you're likely to applaud the decision. But Judge Pool obviously 96 00:05:31,720 --> 00:05:34,960 Speaker 1: thinks the other way, Bob, how much easier does this 97 00:05:35,120 --> 00:05:40,679 Speaker 1: decision actually make it for prosecutors to get insider trading convictions? 98 00:05:40,760 --> 00:05:45,000 Speaker 1: And will it lead to over criminalization? Yeah, So, as 99 00:05:45,120 --> 00:05:47,520 Speaker 1: as Jack suggested earlier. It makes it a good bit 100 00:05:47,600 --> 00:05:50,360 Speaker 1: easier for the prosecutor, and that could lead, of course 101 00:05:50,360 --> 00:05:53,720 Speaker 1: to a great deal more effective criminalization than there's been. 102 00:05:54,200 --> 00:05:57,400 Speaker 1: Whether that will amount to over criminalization, of course, is 103 00:05:57,520 --> 00:06:00,080 Speaker 1: up for debate. Right From one point of view, you 104 00:06:00,160 --> 00:06:02,920 Speaker 1: might say, well, look, it's about time that we had 105 00:06:03,080 --> 00:06:06,520 Speaker 1: dealt with what has been perhaps arguably and under criminalization 106 00:06:06,720 --> 00:06:10,120 Speaker 1: problem in the lead up to the recent financial crisis, 107 00:06:10,120 --> 00:06:12,600 Speaker 1: of course, and in the aftermath. On the other hand, 108 00:06:12,680 --> 00:06:16,240 Speaker 1: there is a danger of rendering the securities markets a 109 00:06:16,320 --> 00:06:19,640 Speaker 1: bit uh, too frightening, you might say, to the unwary, 110 00:06:19,680 --> 00:06:22,000 Speaker 1: if it looks like it's too easy to get yourself 111 00:06:22,279 --> 00:06:24,680 Speaker 1: in trouble for trading on some bit of information that 112 00:06:24,760 --> 00:06:27,240 Speaker 1: you've acquired. So it's always a balance, a question of 113 00:06:27,279 --> 00:06:30,719 Speaker 1: balance thing. I think that probably the balance of late 114 00:06:30,839 --> 00:06:33,640 Speaker 1: has been on the side of that. There's been a 115 00:06:33,640 --> 00:06:35,719 Speaker 1: bit of sort of under criminalization, you might say, and 116 00:06:35,960 --> 00:06:39,240 Speaker 1: so it's probably a good saying that we're widening the 117 00:06:39,240 --> 00:06:42,000 Speaker 1: gates just a little bit um But whether it will 118 00:06:42,040 --> 00:06:43,840 Speaker 1: go too far is another question. We'll have to kind 119 00:06:43,839 --> 00:06:47,160 Speaker 1: of keep our eyes peeled for future cases and future decisions. 120 00:06:47,200 --> 00:06:51,360 Speaker 1: Of course, Jack the Newman decision broke former U S 121 00:06:51,400 --> 00:06:54,680 Speaker 1: attorney pre Barra is more than eight case winning streak 122 00:06:54,720 --> 00:06:57,599 Speaker 1: and lead to more than a dozen insider trading cases 123 00:06:57,640 --> 00:07:02,080 Speaker 1: falling apart. Barra crow it a little in a tweet, saying, quote, 124 00:07:02,200 --> 00:07:06,600 Speaker 1: Unlike Newman, the Martoma decision comports with longstanding law and 125 00:07:06,720 --> 00:07:10,920 Speaker 1: common sense. Do you agree with him? Well, I understand 126 00:07:10,920 --> 00:07:14,560 Speaker 1: why he says that, and I probably agree more than 127 00:07:14,600 --> 00:07:16,840 Speaker 1: I disagree. I wrote a hotbed piece in The New 128 00:07:16,920 --> 00:07:21,200 Speaker 1: York Times last year suggesting that Congress should repeal the 129 00:07:21,280 --> 00:07:24,080 Speaker 1: personal benefit requirement, that it was too high a barrier. 130 00:07:24,720 --> 00:07:26,840 Speaker 1: The courts instead have done in a different way. I 131 00:07:26,920 --> 00:07:30,200 Speaker 1: never contemplated that they would take the gift exception and 132 00:07:30,360 --> 00:07:33,960 Speaker 1: use it to totally swallow up everything else, but it infect. 133 00:07:34,040 --> 00:07:37,000 Speaker 1: It's a major change. My one concern is not so 134 00:07:37,080 --> 00:07:40,800 Speaker 1: much over criminalization versus under criminalization, but the fact that 135 00:07:40,840 --> 00:07:43,800 Speaker 1: all of this is being decided by courts by three 136 00:07:43,880 --> 00:07:47,560 Speaker 1: judges in the original decision Newman and three judges now 137 00:07:47,560 --> 00:07:50,640 Speaker 1: in Martoma, and the whole body of law and inside 138 00:07:50,640 --> 00:07:53,400 Speaker 1: of treading for the last fifty or sixty years has 139 00:07:53,520 --> 00:07:57,840 Speaker 1: never been addressed by Congress. Congress just gets paralyzed on 140 00:07:57,920 --> 00:08:01,840 Speaker 1: close questions doesn't want to touch the But ultimately, the 141 00:08:01,920 --> 00:08:05,040 Speaker 1: criminal law is the area of law where we most 142 00:08:05,160 --> 00:08:08,800 Speaker 1: expect the legislature to set the community standards, and it's 143 00:08:08,800 --> 00:08:11,320 Speaker 1: somewhat strange the judges can swing it one far to 144 00:08:11,400 --> 00:08:13,040 Speaker 1: one side and then swing it back far to the 145 00:08:13,040 --> 00:08:18,720 Speaker 1: other with just three judges decided. Speaking of three judges, Bob, 146 00:08:19,040 --> 00:08:22,960 Speaker 1: is it likely that if Martoma asks the second circuit 147 00:08:23,080 --> 00:08:26,160 Speaker 1: to rehear the case o Bank the entire circuit, that 148 00:08:27,120 --> 00:08:30,400 Speaker 1: the circuit might grant that? Yeah, so I think the 149 00:08:30,480 --> 00:08:33,040 Speaker 1: jack is a better authority than I on the probability there, 150 00:08:33,040 --> 00:08:35,559 Speaker 1: but I can It's what I can definitely say is 151 00:08:35,600 --> 00:08:38,720 Speaker 1: that it's as quite a distinct possibility. Right. There are 152 00:08:38,760 --> 00:08:43,120 Speaker 1: various grounds that are usually given for a telet court 153 00:08:43,160 --> 00:08:45,839 Speaker 1: to sort of rehear a case on unbarked and one 154 00:08:45,840 --> 00:08:48,880 Speaker 1: of them is a circumstance like the present one, in 155 00:08:48,920 --> 00:08:52,200 Speaker 1: which the three judged channel significantly changes what has been 156 00:08:52,280 --> 00:08:55,280 Speaker 1: bought to be sort of settled law within the circuit 157 00:08:55,640 --> 00:08:58,360 Speaker 1: in question. So there's certainly a ground for that. The 158 00:08:58,360 --> 00:09:00,199 Speaker 1: other grounds, of course, or if it is asi and 159 00:09:00,240 --> 00:09:03,040 Speaker 1: introduces a circuit splits Uh, you know, between say a 160 00:09:03,120 --> 00:09:05,880 Speaker 1: second and other circuits, Jack will be well situated to 161 00:09:05,920 --> 00:09:10,120 Speaker 1: sort of assess the nuances if that possibility as well. Um, 162 00:09:10,360 --> 00:09:14,400 Speaker 1: And but again, one of the grounds UH is certainly 163 00:09:14,440 --> 00:09:16,920 Speaker 1: present here, at least in potential. All right, Jack, you're 164 00:09:16,960 --> 00:09:19,559 Speaker 1: on the spot now. Well, I would tell you that 165 00:09:19,960 --> 00:09:24,160 Speaker 1: circuit courts disagree. They have different practices. In the Second Circuit, 166 00:09:24,559 --> 00:09:27,520 Speaker 1: it is no more than four or five percent of 167 00:09:27,559 --> 00:09:31,240 Speaker 1: cases each year in which on bank appeal is sought, 168 00:09:31,360 --> 00:09:34,439 Speaker 1: in which it is granted. They don't typically give on 169 00:09:34,640 --> 00:09:37,960 Speaker 1: bank appeals, but the odds will be stronger in this case. 170 00:09:38,280 --> 00:09:40,920 Speaker 1: First of all, there was a strong and well reasoned 171 00:09:40,920 --> 00:09:44,400 Speaker 1: discent written by Judge Puller. Whether you agree or disagree, 172 00:09:44,840 --> 00:09:47,959 Speaker 1: she told the world that she thought the other two 173 00:09:48,040 --> 00:09:52,320 Speaker 1: judges were unjustifiably changing prior law. That's going to force 174 00:09:52,760 --> 00:09:55,720 Speaker 1: all of the other judges on the Second Circuit, which 175 00:09:55,720 --> 00:09:58,800 Speaker 1: includes the judges who wrote the Newman decision, to read 176 00:09:58,840 --> 00:10:02,160 Speaker 1: her descent careful. I should add that all three of 177 00:10:02,160 --> 00:10:05,240 Speaker 1: these judges are quite respected. We're not talking about someone 178 00:10:05,280 --> 00:10:08,680 Speaker 1: being an outlier here. They're all in the mainstream. And 179 00:10:08,720 --> 00:10:10,679 Speaker 1: I think this has a better chance of getting on 180 00:10:10,840 --> 00:10:14,520 Speaker 1: bank appeal than most other cases. What I do not expect, 181 00:10:14,520 --> 00:10:16,200 Speaker 1: and this is probably going to be your next question, 182 00:10:16,679 --> 00:10:19,640 Speaker 1: is the Supreme Court will hear this? Because the Supreme Court, 183 00:10:19,679 --> 00:10:22,600 Speaker 1: after writing a decision, usually gives several years for the 184 00:10:22,600 --> 00:10:25,520 Speaker 1: circuit courts to interpret this. I don't think the Supreme 185 00:10:25,520 --> 00:10:28,840 Speaker 1: Court will turn again the insider trading until they find 186 00:10:28,840 --> 00:10:31,760 Speaker 1: that there has developed a conflict between the circuits, and 187 00:10:31,840 --> 00:10:34,439 Speaker 1: that will take some other circuit to disagree with this 188 00:10:34,679 --> 00:10:39,959 Speaker 1: the Martoman decision. You know me too well, Jack uh Am, 189 00:10:39,960 --> 00:10:43,160 Speaker 1: I too predictable. Well, here's an unpredictable question, and I 190 00:10:43,160 --> 00:10:44,559 Speaker 1: don't know if you have an answer, Bob, you have 191 00:10:44,640 --> 00:10:49,320 Speaker 1: thirty seconds. Though prosecutors reportedly offered Martoma a deal in 192 00:10:49,360 --> 00:10:54,360 Speaker 1: exchange for his testimony against against Cohen, are those deal 193 00:10:54,400 --> 00:10:58,440 Speaker 1: negotiations ever reopened when it seems like the prison doors 194 00:10:58,480 --> 00:11:02,760 Speaker 1: have been nailed shut and you're stuck, Well, I mean 195 00:11:02,960 --> 00:11:06,480 Speaker 1: occasionally they are, but but oftentimes they're not because in effect, 196 00:11:06,480 --> 00:11:08,520 Speaker 1: you're no longer behind the veil of ignorance. Right, the 197 00:11:08,960 --> 00:11:11,400 Speaker 1: party knows what the stakes are now and there's there's 198 00:11:11,480 --> 00:11:13,960 Speaker 1: less of a gamble involved in making the decision. And 199 00:11:14,000 --> 00:11:16,240 Speaker 1: usually when things are sort of settled in that way. 200 00:11:16,280 --> 00:11:18,120 Speaker 1: When things are more or less predictable in that way, 201 00:11:18,280 --> 00:11:21,160 Speaker 1: there's a little bit less likelihood of a settlement actually 202 00:11:21,200 --> 00:11:25,120 Speaker 1: being or anything being reopened for settlement. All right, I 203 00:11:25,160 --> 00:11:28,280 Speaker 1: want to thank you both for being on Bloomberg Law. 204 00:11:28,320 --> 00:11:31,480 Speaker 1: You make a great team. That's John Coffee, he's a 205 00:11:31,480 --> 00:11:34,600 Speaker 1: professor at Columbia Law School, and Bob Hocket, a professor 206 00:11:34,679 --> 00:11:38,720 Speaker 1: at Cornell Law School, both experts in this area of 207 00:11:38,760 --> 00:11:39,880 Speaker 1: white color crime.