Second Circuit Heightens Risks of Insider Trading Investigations and Prosecutions

[...]in a 2-1 decision that featured a forceful dissent by Judge Amalya L. Kearse, the Second Circuit adopted an expansive definition of "property" for purposes of the wire fraud and Title 18 securities fraud statutes, holding that "predecisional" confidential government information relating to planned medical treatment reimbursement rate changes constituted government "property" necessary to bring insider trading cases under an embezzlement or misappropriation theory. [...]absent a breach by the insider, there is no derivative breach" by those who passed on or traded on the inside information. Because the insiders in Dirks did not benefit from their disclosures to Dirks, but rather "were motivated by a desire to expose the fraud," they did not breach any fiduciary duty; Dirks thus "had no duty to abstain from use of the inside information that he obtained." 3 What constitutes a "personal benefit" under Dirks has been the subject of significant litigation in recent years, including the extent to which gifting of confidential information to friends or relatives satisfied the personal benefit test.4 In the 2002 Sarbanes-Oxley Act, Congress added a new securities fraud provision to the criminal code, 18 U.S.C. § 1348, to "supplement the patchwork of existing technical securities law violations with a more general and less technical provision, with elements and intent requirements comparable to current bank fraud and health care fraud statutes. Distinguishing Carpenter, the Supreme Court noted that "whatever interests Louisiana might be said to have in its video poker licenses, the State's core concern is regulatory" and those interests "cannot be economic." (emphasis in original). Because "the State did not decide to venture into the video poker business," but instead "permit[ted], regulate[d], and tax[ed] private operators of the games," the Court concluded that the licenses in the State's hands did not constitute "property."