In recent years, federal prosecutors in the United States have targeted individuals using extremely broad–and sometimes counter-intuitive–theories of federal criminal law. This phenomenon has received attention in all quarters, including at the United States Supreme Court. In one example of such a prosecution that we will discuss below, Justice Elena Kagan described "the real issue" in the case as being "overcriminalization and excessive punishment in the US Code."2 The Supreme Court trend has been either to decline to review lower court decisions rebuffing aggressive prosecutorial theories, or to take cases and reject the Department of Justice's legal position.
The Department's most recent high-profile loss came with the Supreme Court's refusal to review the Second Circuit's decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014). That decision overturned two convictions for insider trading based on an expansive argument of what constitutes that crime. The classic form of insider trading occurs when a corporate insider trades on material, non-public information. Newman involved a subset of that doctrine under which someone who pays an insider for information, and then trades on that information, becomes liable for insider trading. Under this theory, the liability of the person who pays for inside information (called the tippee) derives from the liability of the insider who provides information in exchange for payment (called the tipper).
In Newman, the government prosecuted two hedge fund portfolio managers for trading on information that originally came from insiders at Dell and NVIDIA. As the Second Circuit's opinion explains, the defendants "were several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information." The government's theory was that, because the defendants were "sophisticated traders," they "must have known that information was disclosed by insiders in breach of a fiduciary duty, and not for any legitimate corporate purpose." The defendants moved for a judgment of acquittal, arguing that the relevant corporate insiders received no personal benefit for their "tips" and that, even if the insiders did receive some benefit, the defendants had no idea that any such benefit existed–since, again, they were several people downstream from the initial tippee–and so they could not be guilty of insider trading.
The United States Court of Appeals for the Second Circuit agreed and vacated the defendants' convictions. It explained that "the insider's disclosure of confidential information, standing alone, is not a breach." "[W]ithout establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach." The Second Circuit further held that the personal benefit the insider receives for the tip must be something meaningful and concrete. While that benefit can be inferred from a personal relationship, it must be "a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Otherwise, "the personal benefit requirement would be a nullity," which would, in turn, suggest that everyone who trades on inside information would be in the crosshairs.
The Department of Justice sought certiorari on the issue of what constitutes a "benefit" for purposes of insider-trading liability. But the Supreme Court declined to take the case. That means that–at least for now–Newman is the law in the Second Circuit. That is an important development, since the Second Circuit oversees Manhattan, which is the center of the American financial universe.
DOJ has likewise suffered a string of recent defeats in cases the Supreme Court decided on the merits. For example, in the case we quoted in the opening paragraph, the Department's lawyers had prosecuted a commercial fisherman for tossing undersized grouper overboard in an attempt to avoid civil fishing infractions. The prosecutors used the "anti-shredding" provision of Sarbanes-Oxley–the financial-fraud statute Congress passed after the Enron collapse–as their legal support. The Supreme Court rejected that illogical application of Sarbanes-Oxley, explaining it is "highly improbable that Congress would have buried a general spoliation statute covering objects of any and every kind in a provision targeting fraud in financial record-keeping."3
In another recent case, federal prosecutors tried a Philadelphia woman for violating the Chemical Weapons Convention Implementation Act, which codified the Convention on the Prohibition of the Development, Production, Stockpiling, and Use of Chemical Weapons and on Their Destruction. The conduct that the prosecutors claimed was a violation of that international treaty? The woman put chemicals on her neighbor's doorknob–apparently giving the neighbor a thumb burn–as part of an acrimonious love triangle involving the woman's husband and an out-of-wedlock child. The Supreme Court rejected that unreasonable interpretation of federal law. It explained that, if the statute implementing the international chemical weapons treaty actually reached the minor conduct at issue, "it would mark a dramatic departure from [the American] constitutional structure and a serious reallocation of criminal law enforcement authority between the Federal Government and the States."4 It thus rejected the Department's theory and overturned the woman's conviction.
While it is too soon to tell for certain, it looks like this trend of over-criminalization and excessive punishment may accelerate. This past fall, in response to long-running criticism that it treats executive wrongdoing too leniently, DOJ announced a new policy of increased focus on prosecuting individuals for federal crimes, as opposed to accepting general corporate pleas. As the Deputy Attorney General put it, "regardless of how challenging it may be to make a case against individuals in a corporate fraud case, it's our responsibility at the Department of Justice to overcome these challenges and do everything we can to develop the evidence and bring these cases."5 That increased targeting of executives will likely lead to more trials of individuals in high-stakes cases and thus to increased judicial engagement with DOJ's expansive legal theories.
If recent history is any guide, the United States Supreme Court will not welcome future novel theories of federal criminal law. Should the Department of Justice push the legal limits as part of its new policy of prosecuting more individuals, we may see the Supreme Court get even more involved in policing the scope of federal criminal law. And that may mean more losses for DOJ before America's highest court and, in turn, at the trial and lower appellate court levels.
- Mr Asbill is a partner and Mr. Burnham is an associate at Jones Day in the firm's Washington, DC office. The views expressed in this Article are solely those of the authors and do not necessarily reflect those of the law firm
- Yates v. United States, 135 S. Ct. 1074, 1100 (2015) (Kagan, J. dissenting)
- Yates v. United States, 135 S. Ct. 1074, 1087 (2015) (plurality op.)
- Bond v. United States, 134 S. Ct. 2077, 2093 (2014)
- Deputy Attorney General Sally Quillian Yates Delivers Remarks at New York University School of Law Announcing New Policy on Individual Liability in Matters of Corporate Wrongdoing, Department of Justice (Sept. 10, 2015), available at http://www.justice.gov/opa/speech/deputy-attorney-general-sally-quillian-yates-delivers-remarks-new-york-university-school