Hearings on Judge Neil Gorsuch’s nomination to the Supreme Court began March 20, and some legal experts suggest that his positions on over-criminalization and statutory vagueness make him potentially friendly to criminal defendants.
Gorsuch’s speeches and opinions reveal a judge inclined to construe criminal statutes narrowly and to hold the prosecution to its burden of proving every element of an offense. But equally important to understanding Gorsuch’s overarching philosophy of interpreting criminal law will be distilling his approach to a developing issue in white-collar prosecutions — the need to properly define core offense elements when prosecutions are stretched to reach actors and acts outside of a criminal statute’s heartland.
Recent insider trading jurisprudence illustrates this challenge. Thirty-five years ago, the U.S. Supreme Court held that trading on the basis of material, nonpublic information was only a crime if it involved a breach of duty of trust to the information’s owner. The high court also held that to establish such a breach where an insider provides information to an outsider who trades on it, the government had to prove that the insider received a personal benefit in exchange for the disclosure. The “personal benefit” test was intended to constrain prosecutorial over-reaching and limit application of the criminal law to corrupt, tipper-tippee relationships.
By 2014, however, insider trading prosecutions frequently focused on more attenuated actors far removed from the tip’s source. The U.S. Court of Appeals for the Second Circuit sought to curtail this trend in United States v. Newman.
In Newman, the government alleged that financial analysts received information from corporate insiders and then passed the inside information to their portfolio managers, including Todd Newman and Anthony Chiasson, to execute the trade. Newman and Chiasson, however, were three or four steps removed from the source of the information and received the tip through game of telephone in which they never knew the source. Also, the financial analysts — the first-level tippees — were friends, not fiduciaries, of the corporate insiders and never traded on the information.
The Second Circuit rejected the government’s attenuated theory of liability and sought to preserve the essential duty-breach core elements of insider trading by requiring proof that a tippee knew that a tipper received something of a “pecuniary or similarly valuable nature.” The court admonished that the government’s “overreliance on our prior dicta merely highlights the doctrinal novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.”
The ruling was met with vociferous protests by the Department of Justice, which claimed such a standard would imperil future prosecutions. And at first blush, it appeared that those protests were heard when the Supreme Court suggested in Salman v. United States that Newman was inconsistent with prior precedent. But the high court’s rebuke of Newman is clearly limited to situations involving gifts to a family and friends. The real question is how courts will respond if, in the wake of Salman, prosecutors again stretch the statute to cover remote tippees arguably beyond the law’s proper reach.
If prosecutors do attempt to reach these remote tippees, it would not be the first time that prosecutors have used white-collar statutes with vague terms aggressively until courts intervened. For years, prosecutors used the mail and wire fraud statute, which criminalized schemes to obtain money or property through false representations, to reach frauds involving “intangible harms.” This included a defendant’s deprivation of the “honest services” owed to another, such as “honest services” a public official owes to the public.
After the Supreme Court ruled that interpretation improper in McNally v. United States, Congress added a provision to the wire fraud statute overruling McNally and reviving the honest services theory of liability. Prosecutors began to push the bounds of the new statute to reach all kinds of conflict-of-interest and self-dealing scenarios. This expansion was checked again by the Supreme Court in Skilling v. United States, which limited the honest services fraud statute to its “heartland” of bribery and kickbacks, rather than self-dealing.
The Supreme Court has subsequently rejected an overly-broad determination of what constitutes an “official act” by a public official, and it seems likely that in the near future the high court will be asked to intervene again to define core concepts of the bribery and honest services statute.
For example, it is well-established that a quid pro quo agreement is the essence of bribery, but prosecutors have sought, and some lower courts have approved, instructions that allowed juries to infer the existence of a bribery scheme from a “stream of benefits” rather than requiring proof of a quid pro quo agreement between the giver and receiver of the bribes.
Assuming Gorsuch is confirmed, he likely will have a chance to prove whether he is a disciple of the late Justice Antonin Scalia when it comes to putting a brake on the overextension of criminal statutes. If, as a justice, Gorsuch does not heed these limits, it is possible that Scalia’s fears that prosecutors will push white-collar criminal statutes to their outer boundaries could be realized.