Congress should define insider trading, influential U.S. judge says

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By Jonathan Stempel

<span class="articleLocation”>Three months after the U.S. Supreme Court upheld
his decision in a major insider trading case, a federal judge
called on the new Congress to pass a law that simplifies and
broadens the definition of when trading on confidential
information is illegal.

U.S. District Judge Jed Rakoff in Manhattan said the United
States has “fallen behind” Europe in failing to recognize that
insider trading should be defined by statute, not through “judge-made” law that creates unnecessary uncertainty.

“Something that is simpler and broader would be
advantageous,” Rakoff said on Wednesday at a securities
litigation conference at the New York City Bar. “A statutory
definition would be much preferable.”

The Supreme Court ruled on Dec. 6 that a gift of
confidential information that enables friends and family to
profit could violate securities laws, even if there were no
tangible benefit such as cash given in return.

That upheld a decision Rakoff had written in July 2015 for a
federal appeals court in California, where he was temporarily

Rakoff on Wednesday said that as the scope of insider
trading has expanded over time, “ever more complicated theories
have had to be spun” to explain why activity that went beyond “obvious cheating” should be illegal.

He said prior bills in Congress to define insider trading
drew “vigorous” resistance from the U.S. Securities and Exchange
Commission, in part because any definition might be too narrow.

Appointed to the bench by President Bill Clinton, Rakoff has
been a thorn for the SEC in high-profile cases.

He rejected a settlement in 2009 with Bank of America Corp for concealing losses at Merrill Lynch, before later
approving a revised accord that he called “half-baked justice.”

Rakoff rejected a Citigroup Inc settlement in 2011 in
a mortgage fraud case, though he was later overturned.

In his speech, Rakoff spoke approvingly of the European
Union’s approach to insider trading, with its goal of ensuring
equal access to information, and allowing punishment of those
who “ought” to know their trading is wrongful.

“Because the EU approach focuses not on fraud but on
equality of access,” Rakoff said, “it has virtually none of the
difficulties that plague U.S. law.”

Rakoff briefly mentioned the Supreme Court’s upholding of
his decision in the California case, Salman v United States.

“I don’t know why I’m familiar with that case,” he said,
drawing muffled audience laughter.

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