The professions of Senator Burr and the STOCK law
On February 13, 2020, one day after receiving a confidential briefing on the imminent likely effects of the COVID-19 pandemic in the United States, Senator Richard Burr sold between $ 628,000 and $ 1.7 million in shares. The pandemic spread to the United States soon after, and Senator Burr avoided significant losses when the value of these stocks fell. As a result of this news, there was a lot of public outrage and numerous calls for Senator Burr to be punished. Some observers have specifically requested that this sanction include criminal prosecution under the STOCK (Cessation of Commerce) Act (Public Act 112-105), which sought to prevent members of Congress from committing crimes of ‘insiders. And of course, according to press reports, the SEC and the Department of Justice have opened inquiries into the conduct of Senator Burr.
But the STOCK Act does not actually create criminal (or civil) liability for insider trading by members of Congress; rather, it clarified that members of Congress have a fiduciary duty to Congress for the purposes of existing insider trading prohibitions; and that members of Congress are subject to the same rules on insider trading as any other person who has this type of duty and are therefore prohibited as “insiders” from trading in material non-public information (“MNPI” ). (P.L 112-105 § 4).
In a public statement, Senator Burr did admit that he was directing operations on his account, but said he did so on the basis of publicly available press reports. In light of this statement, much of the commentary on the potential difficulty in prosecuting Senator Burr focused on the possible difficulty of proving that his trades were based on the MNPI, rather than on publicly available information as he pretends. But it will probably not be difficult to prove that Senator Burr negotiated on the basis of the MNPI.
Negotiation “on the basis” of MNPI (Important non-public information)
It is well known that in a flagrant exception to the American legal principle prohibiting common law offenses, no federal law explicitly prohibits insider trading. Instead, insider trading has traditionally been prohibited by a series of SEC rules and judicial opinions interpreting broader federal laws and regulations on securities fraud, in particular section 10b of the Exchange Act of 1934 and SEC rule 10b-5 implementing it.
In 2000, the SEC promulgated rule 10b5-1, which defines what it means for an insider to trade “on the basis” of material non-public information, a necessary element of an insider trading transaction : in the absence of other specific affirmative defenses, “The purchase or sale of a security … is” on the basis of ” [MNPI] about this security … if the person buying or selling was aware the [MNPI] when the person made the purchase or sale. »17 C.F.R. § 240.10b.5-1 (b) (not underlined in the original). The Second Circuit Court of Appeals, the federal court of appeal covering New York’s trial courts, where most insider trading cases are brought, approved this MNPI “knowing possession” standard. See United States c. Rajaratnam, 719 F.3d 139, 158-59 and n.24 (2d Cir. 2013)
Therefore, Senator Burr’s apparent defense that when he made transactions because of what he learned from publicly available press reports, rather than from the confidential briefing note he undoubtedly had received, is irrelevant – all the government needs to prove is that Senator Burr did business when he was “aware”. »Of the information he received during the briefing, assuming that the briefing constitutes the MNPI. The government does not need to prove that there was a causal link between Senator Burr’s learning of this information and his decision to negotiate.
MNPI “About this security or this issuer”
However, a prosecution under rule 10b-5 may have to overcome, possibly overcome at least one other obstacle. Rule 10b5-1 prohibits that the conduct “includes … buying or selling a security of an issuer, based on [MNPI] about this security or the issuer, in violation of a duty, a trust or a trust which is due… to any person who is the source of important non-public information ”(emphasis added). 17 C.F.R. § 240.10.b5-1 (a). The phrase “about this security or this issuer” raises interesting questions about whether Senator Burr can be prosecuted or prosecuted for violating this traditional insider trading law, even if he has done operations while being aware of the MNPI that he learned as a member of Congress.
For example, one of the stocks that Senator Burr sold after receiving the classified briefing was Wyndham Hotels. Obviously, if the briefing that Senator Burr received included an analysis of the exposure of all major American hotel chains to a COVID-19 pandemic, and specifically described the expected effects on Wyndham’s operating results, then he engaged in insider trading in violation of rule 10b-5.
But suppose as an argument that the briefing that Senator Burr received (1) did not contain any information specific to Wyndham hotels, and also suppose that Wyndham only operated in the United States); and (2) informed him that there was a high probability that COVID-19 would become as widespread in the United States as in China. Any prudent investor would understand that the US wholesale travel and tourism industry, of which Wyndham is a part, would suffer economically if similar public health measures were instituted in the United States as previously imposed in China – is that does this make classified briefing information “about” Wyndham for the purposes of this rule?
What if the classified briefing did not focus on the public health aspects of the pandemic, but on economic effects in general – for example, if the briefing informed senators that the U.S. economy was likely to contract in 2020 due from COVID-19 – again, any prudent investor would understand that such an economic contraction would likely affect the US travel and tourism industry in general, and therefore Wyndham. Would this classified information be “about” Wyndham as defined by the rule?
Or if the briefing included information more specific to the hotel sector but not to Wyndham, such as an analysis predicting that the occupancy rate of hotel rooms in the United States in 2020 would drop by 50% compared to 2019 levels? Would this constitute information “about” Wyndham for these purposes?
There are no clear answers in law, regulation or case law to these questions, and it is fairly easy to make plausible arguments on either side of this question of regulatory interpretation. But the root of the problem is that the type of “insider” traditionally accused of insider trading is a person related to the issuer of a particular security, such as a director or officer of a specific company, or a person who hijacked the MNPI from a specific company. business, like the lawyer of a business. When such persons abused MNPI, it was almost invariably MNPI related to that company or to a company transacting with it – an insider with early access to a results report or confidential knowledge of a company. merger to come. This is why rule 10b5.1 a) is drafted as it is. But while Congress can sometimes have access to such business-specific information, by its very nature, Congress often has access to sectoral or economic information.
Ramifications of legal uncertainty
Before proceeding with a case, a prosecutor or regulatory body should know the specific content of the classified briefing, compare it with the actions exchanged by Senator Burr, and then carefully consider the problems. And as one academic commentator has pointed out, at least with regard to non-public, “economy-wide” material information if members of Congress and their staff cannot exchange while in possession of this information, such an interpretation in fact prohibits covered individuals from trading. stock at all. And because Congress has not enacted such a trade ban (as others have proposed, and some are proposing it again in the wake of Senator Burr’s sales), the courts should not interpret the rule. a way that has the same result as what Congress specifically refused. legislate.
But Senator Burr should not take comfort in this potential legal defense. Because he should also note the word “including” preceding the quoted passage from rule 10b5.1 (b) – so if a prosecutor or regulator has another theory establishing liability for insider trading without relying on rules 10b-5 and 10b5-1, such as a theory, would not necessarily be bound by the language and interpretations of these rules.
It turns out that the recent decision of the second circuit United States c. Blazczak, 2019 WL 7289753 (2d Cir.30 Dec. 2019) confirmed the new use by federal prosecutors of the Postal Fraud Law and another securities fraud law (18 USC§§ 1341 and 1348 ) to prosecute insider trading. And in asserting the use by prosecutors of these laws for charging insider trading, the second circuit also held that, when prosecuting cases using these laws, the government did not need to prove some of the elements which he had to prove when he was prosecuting insider trading using the “traditional” Bases of the Exchange Act of 1934 and of rule 10b5 implementing it. Prosecutors currently investigating Senator Burr’s transactions should be well aware that the second circuit gave them another tool that would likely allow them to charge Senator Burr without having to prove that the MNPI he learned in the briefing was “on” Wyndham, or one of the other stocks he traded.
These questions highlight the distinct atypical circumstances of an insider trading case involving a member of Congress who violates his obligations to the American people by exchanging material non-public information which he has learned through his position as member of Congress, as opposed to a corporate insider who violates their duty to the company and its shareholders by negotiating material non-public information that they have learned because of their position as an insider. As with the state of insider trading law more generally, clarification from Congress and the SEC on this issue would be helpful.
 See Jeanne Schroeder, “Taking STOCK: insider and outsider crimes by Congress”. 60 William & Mary Business Law Review 159, 236-37 (2014)
 In another of its provisions, the STOCK law ordered the ethics committees of the two chambers of Congress to publish guidelines specifying that members and their staff cannot benefit from the information they learn through their public positions . (P.L 112-105 § 4 a)). This alternative sanction imposed on members of Congress and staff who profit from the negotiation of material non-public information on an economic or sectoral basis offers another reason to conclude that, in the STOCK Act, Congress does not ‘had no intention of punishing such behavior as a violation of already existing insider trading laws.