The federal courts since the 1960s have imposed criminal sanctions for insider trading violations without a statute defining the prohibited conduct. They have done so based on a statute that authorizes criminal sanctions for violations of rules promulgated by the Securities and Exchange Commission and an SEC regulation that prohibits, without defining, conduct we have come generally to call “insider trading.” Yet, in 1812 the U.S. Supreme Court held, in United States v. Hudson, 11 U.S. (7 Cranch) 32 (1812), that federal courts lack constitutional authority to define criminal conduct and decide common-law criminal cases. It is time for the federal courts to adhere to Hudson and get out of the business of enforcing an administrative agency’s rule as a crime. It is also time for Congress to perform its constitutional function, if it wishes to have continued criminal enforcement, and enact an insider trading statute.
On May 9, 2017, the U.S. Court of Appeals for the Second Circuit heard further argument in the case of Mathew Martoma, serving a nine-year sentence for insider trading. One of the issues that the court will consider is how much, if any, of its 2014 Newman personal-benefit standard (773 F.3d 438 (2d Cir. 2014)), a required element for insider trading conviction, survives the Supreme Court’s 2016 ruling in Salman (137 S. Ct. 420 (2016)). That is an important issue. In deciding the Martoma appeal, the Court of Appeals may also want to consider the more fundamental issue of whether it even has the constitutional authority to decide an insider trading criminal case.
