December’s seismic insider-trading ruling by a Manhattan federal appeals court set a higher standard for proving the financial crime, potentially making it harder for prosecutors and regulators to win cases.
But it wasn’t enough to convince U.S. District Judge Jed Rakoff that two Wall Street brokers accused of insider trading shouldn’t face trial.
In a brief order issued Friday, Judge Rakoff said the earlier ruling by the Second U.S. Circuit Court of Appeals made the case brought by the Securities and Exchange Commission a “close call” but said the brokers should still be tried.
“[T]he Court takes cognizance of the fact that some of the issues the motion presents are a much closer call in light of United States v. Newman…than they would have been otherwise,” he wrote.
In the decision last year, the Second Circuit overturned two unrelated insider trading convictions, saying prosecutors based their case on insufficient evidence that stretched the limits of the law too far.
The two defendants in the case before Judge Rakoff are accused by the SEC of trading on tips about IBM Corp.’s acquisition of a software company in 2009. They argued in an August motion that the SEC clearly lacks evidence to back up its case, particularly in light of the Second Circuit’s narrower definition of insider trading.
While denying the defendants’ motion for summary judgment, Judge Rakoff later on Friday agreed to put off the trial while the Supreme Court considers whether to review the Second Circuit precedent.
As WSJ earlier reported, the Obama administration in July asked the Supreme Court to review United States v. Newman. In a petition, U.S. Solicitor General Donald Verrilli said the December decision clashed with long-standing precedent and had troubling implications for the government’s ability to police Wall Street.
The ruling is the latest instance of Judge Rakoff signaling unease with the Second Circuit holding.
In April, he allowed the same insider-trading lawsuit to proceed, saying the Second Circuit’s reading of past precedents governing insider-trading law “may not be obvious.” And this summer, when he was temporarily assigned to a federal appeals court in California, he expressed more skepticism with the Second Circuit’s interpretation of insider trading laws.
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