Insider Trading: Honoring the Past｜A Program Commemorating the 40th Anniversary of Chiarella v. U.S.
Good morning. I'm stephen, choi, a professor, at nyu, law school, and co-director, of the nyu, pollock center. I'd like to welcome everyone today to our event honoring, the 40th, anniversary. Of the supreme, court's. Chiarella, versus, united states. Decision. This event is jointly sponsored, by the indiana, university, mars school of law. The nyu, pollak center, and the sec, historical. Society. I would like to thank. Anat, carmi weichmann. And peter robau, at the pollock center. For all their efforts in putting together, this event, and jane cobb of the sec historical, society. For her support. And, i would like to of course thank donna nagy. A professor, at the indiana. University, mars school of law, was really the driving, force. Behind, this event. Now, we're a little over 40 years since the supreme court's chiarella. Decision. The framework, today, for the regulation, of insider, trading, starts, with. Section 10b, of the securities, exchange, act of 1934. And sec, rule 10b5. Under that framework. Not every trade, based on a non-public. Material, informational. Advantage. Is. Problematic. There must be fraud. Or put another way some manipulative. Or. Deceptive. Device. Insider, trading. Is a fraud, of. Omission. But for an omission, to be a fraud. The wrong doer must have. A duty. To. Disclose. A duty, to disclose. We know now that this duty to disclose. In the insider, trading context. Arises, from a relationship. Of trust. And confidence. Or similar, such. Relationship. Now there are questions, that courts have wrestled with. In the years, after, chirella. About when exactly, there is a duty, to disclose. Arising, from a relationship, of trust. And confidence. For example. If i misappropriate. Information, from a third party, source. And trade, with a counterparty. Based on this information. Does this count. If i receive a tip from a tipper. Who owes such a duty but i, do not directly. And i trade based on the tip. Does this count. If i receive information, from a family, member in trade. Does this violation, of a family, relationship, of trust and confidence. Count. While there's been a lot of case law, on the question of when there is a duty to disclose. Let's return. To the beginning. Chiarella, was the watershed. Case. That addressed, the issue of whether rule 10 b5, liability. Required. A duty, to disclose. Arising, from a relationship, of trust and confidence. In the first place. Vincent, chiarella. Was an employee, of a financial. Printer. Pandit, press. The acquirer. In a series of corporate, takeovers. Had hired, the printer. To create announcements. Related to takeover, bids.
While Information, on the identity, of the target companies, was hidden. Chiarella, was able to deduce, the identity, of the targets. From the information, in the announcements. Perhaps realizing, that the stock, price. Of a target company. In a takeover, typically, goes up after announcement, of the takeover. Chiarella, purchased stock of the targets, prior to the announcements. Making thirty thousand dollars. In profits. Importantly. Chiarella. Had no prior, relationship. With the target companies. Or. Their selling shareholders. Put another way. He was a stranger. Nonetheless. Chirella, was indicted. And convicted. In a jury trial. The second circuit affirmed, chirela's, conviction. In its affirming, opinion the second circuit wrote and let me quote here. Anyone. Corporate, insider. Or not. Who regularly, receives, material. Non-public. Information. May not use that information, to trade in securities. Without, incurring. An affirmative. Duty, to. Disclose. The second circuit went on to say that the securities. Laws, quote. Created, a system, providing. Equal, access, to information. Necessary. For reasoned, and intelligent. Investment. Decisions. Now this is what some refer to as the equal, axis. Theory. So the notion prior to cirella. Was out there that unequal. Access to particular. Kinds, of information. Such as non-public. Corporate, information. Could give rise to a duty to disclose. And rule 10 b5, liability. For, anyone. Including. A stranger, like. Chiarella. Regardless. Of their relationship. To the company. And the company's, shareholders. The supreme court overturned, shirella's, conviction. And reversed, the second circuit. Regardless. Of policy, arguments, about. What, information, advantages, to allow or disallow, in the market. Section 10b, and rule 10b5. Require. Fraud. The court held that for purposes, of section 10 being rule 10b5. The element, required to make silence, fraudulent. Is. A. Duty to disclose. Moreover. This is not a generalized. Duty to all participants. In market transactions. Instead. It focuses, on. Specific. Relationships. Between, two parties. Whether there is a relationship. Of trust. And confidence. Because the jury instructions, in chiarella's. Criminal, trial, did not specify, that the jury must find. Such, a duty to disclose. The court reversed, shirelle's, conviction, under section, 10b. And rule 10b5. One of the concurring, opinions. In chiarella. Presented. What we now refer to as. The, misappropriation. Theory. The possibility. For purposes, of rule 10v5. Liability. That a person trading, in securities. Based on non-public. Material. Information. Violated, a different, kind, of duty to disclose, involving, a different, kind, of. Relationship. Not to the counterparties. In the transaction. But instead, to the source. Of the information. We can imagine, for example. A newspaper, reporter, taking information, from her employer. The newspaper. The source. And trading the securities, of companies. Covered by the newspaper. Based on the information. So the source of the information, is separate, from the company. Whose securities. Are being traded. As in. Chiarella. There are many potential, third party sources of information, relevant, to, the trading, of securities. The majority, in chiarella. Sidestepped. The misappropriation. Theory. Stating, that it did not have to decide, the merits of the theory. Because the jury that convicted, chiarella. Was not presented, the misappropriation. Theory. Now what i've summarized, on the ciarella, case, is what we typically, cover. In a law school class. But, what we don't cover. Is how exactly, did the majority, of the supreme, court. Get to its position. On rule 10b5. And the importance, of the duty to disclose, arising, from a specific. Relationship. Between, parties. This is something that professor, donna nagy has written on recently. In an excellent, law review article that is available. On the sec, historical, society's, website. As well as the pawlik, center website. For this event. And i encourage everyone to take a look at, her article. In thinking about, how the majority, in chiarella. Got to its position. There are important, questions, and what role. Did the defense, attorneys, and the attorneys, at the sec, and the doj. Have. In formulating. And presenting, theories, of how rule 10 b5. Applies, to insider, trading. What choices were made in deciding, to appeal, chiarella, to the supreme, court. And how did all these choices, result, in the chiarella, supreme court opinion. After the cheer of the decision. How did attorneys, at the sec, and doj. Respond. I'm looking forward to finding out answers to these questions, in today's. Event. I'll now turn it over to professor, donna nagy. Who will moderate, the first panel which is on the chiarella.
Prosecution. And supreme, court. Litigation. Thank you. Thank you steve. I'll now invite, our first group of panelists, to turn on their cameras. It is my great honor, and privilege, to be moderating, a discussion, among, three, of, our, country's, most distinguished. White-collar. Criminal defense, attorneys. By way of a, very brief introduction. I'll share, only their current positions. As well as their individual, roles, in the chiarella. Case. We'll hear first from john rusty, wing, now a member, of lanker, suffer. And. Law firm, but from, 1971. To 1978. He was chief of the securities, and business fraud unit for the southern district of new york's, u.s attorney's, office. We'll also be hearing from john s siffert, co-founding. Member of lanclair, sifford and wall and an adjunct, professor, at nyu, school of law. But from, 1974. To, 1979. He was assistant, u.s attorney, in the southern district, of new york. He prosecuted, the ciarella, case, and successfully. Argued the second, circuit, appeal. Toward the end of our panel we'll be joined by stanley, s arkham. Founding, member, of arkansan. Llp. And a founding, member of the arking, group. He represented. Vincent chiarella, at his criminal, trial, and second circuit appeal. And argued, successfully. On behalf of his client before the united, states supreme, court. Before he joins us though i'm delighted, that i'll have a few video, clips, from a recent, interview. With stanley. Finally judge jed raykoff, will be joining the webinar, for the second, panel. He was rusty wing's successor. In 1978. As fraud, unit, chief. Before, i launch us in, to what i know, will be a fascinating. Discussion. I want to offer, two preliminaries. The first is a heartfelt. Tribute, to sec, historical. Society. Co-founder. And long-time. Sec. Solicitor. Paul gonson. Paul passed away last april. But had been very much looking forward, to participating. On this panel. It was paul's, tremendous. Encouragement. And enthusiasm. That initially. Inspired, me to research, the chiarella. Backstory. I'm truly, grateful. And i know he is sorely, missed, by so many of our viewers, today. I also want to spend just a minute. On what i hope will be one of the webinar's. Principal, takeaways. As someone who has taught and written about insider, trading law for more than 25, years. I often, emphasize, to my students, and readers, that insider, trading law is judicially. Created. Insider, trading law is judge, made. But it must my work on this ciarella, history, project. That underscores, for me, what is lacking. Or, incomplete. With that shorthand. Description. The description. Of insider, trading law, as judge made. Does not account, for the essential, role played by prosecutors. And defense, attorneys. In framing, the arguments. On which the judicial, rulings. Are based. I hope these essential, roles become, vividly, clear to all of you. In the course of this panel discussion. So with that i will turn to rusty wing first for a series of questions. About the southern district of new york's, fraud unit, in the 1970s. Rusty could you please start off with some background, information. About the southern district of new york's fraud unit, and its formation. Sure, the. Unit. Was. Initiated. Many years before i, arrived in the office by, robert morgenthal, who was then the u.s attorney. And at the time i was there and serving, as the chief of the unit. It had. I would. I think objectively. Say, some of the finest, lawyers in the office, were in that unit. And that was in part because the cases, in the unit. Were both, very, substantial. Complex, often high profile. Cases, of fraud. Generally. And the defense, lawyers in those cases were the best in the business. So, you needed. Very, trained. Good experienced. Trial lawyers. To be able to go up against these, very experienced, defense lawyers, well and we'll be hearing from, some of them today. Um so what do you recall. Um. In the unit when do you recall. In the unit, first discussing. The possibility. Of bringing, a criminal, action. Under, sec, rule 10b5. For insider. Trading. Well my recollection. Uh does not go as far back as i'm going to start. But i have i've had, the benefit, in preparing, for the program of some conversations. With ira lee sorkin. All well known as ike sorkin. Who used to be, at the sec. And then came and joined, the us attorney's office and.
Went Very quickly, into the fraud unit, given his, his knowledge of, securities, law. And. He recalls. That, back when he first joined the office. Before bob fisk was the us attorney i think mike seymour was the u.s attorney. He recalls, talking with either seymour, or seymour's, successor, paul kern. About an idea, he had. That there were a substantial. Number. Of. Insiders. Or others. Trading, on. Material. Non-public. Information. Right, before. Earnings. Information. On the 10-q. And. He got seymour, to. Provide him with a high school. Student who assisted, in some research. Where they looked at for a number of 20 companies. Um. Trading, two weeks before the release of earnings, and two weeks after. And, ike found an enormous. Disproportion. Of. Heavy trading, in the two weeks before. Either buying, or selling, and then the reverse, trading. Either selling or buying. As soon as the stock had either gone up or down, in the two weeks after the training. Unfortunately. Or, i don't know whether it's fortunate or not but. Neither, seymour, nor. Curran. And he also thought he would have talked with with bob morvillo, or. Um. Tom edwards who were chiefs of the criminal division at the time. No one apparently. Said go ahead let's look into this. Ike doesn't recall, talking to me i don't recall talking. I'm sure we talked i'm positively, talked about, and, and then. We started, looking ike left in 1976. Before the ciarello, case started. But. We looked at katie roberts, in 1961. The sec, commissioned. Opinion. Which. In its initial sentence says this is a case of first impression. And that was a a, case where. They did find, that you could impose, a duty. On someone who wasn't. A. Natural, insider, a director, officer, etcetera. Um. When when that particular, person was was, trading. Uh, on the benefit, having received. Had a special, relationship, with the term in the opinion. That they received, insider. Inside, information. About what was going on in the company. Yeah so. So if we can. Go to, so the sec, settled its case against chiarella. In. May of, 1977. Chiarella, consented. To an injunction.
And Agreed to disgorge, his ill-gotten. Gain. Of about 30 thousand dollars. The settlement was reported. In the new york times, in the wall street journal, and i believe soon, after, that, the, uh, fraud unit began contemplating. The possibility. Of proceeding, with a criminal, case. Against, chiarella, what what do you recall of that decision, making. Well i recall, it, based on katie roberts, and the, subsequent, second circuit decision, texas, gulf super, also. Expanding. The the concept, that anyone who has. Material, non-public, information. Should be prohibited, from trading, unless it's unless the facts are disclosed. So, we thought we should, bring a case. Um, it seemed that. Chiarello, had all the right. Elements. To do and he basically, he'd settled the case and acknowledged. To some extent his wrongdoing. And, bob fisk who was then the u.s attorney, was very much. In agreement, and thought, we should go ahead there was some discussion. Should we wait until we have a case with a, more high-profile. Corporate, director, or officer, of a company. And decided, we didn't need to wait we could go forward. Just as it is, and so. Another assistant, jack lowe got an indictment. Which was returned, around, january. 4th of, 1978. And, um. He was then, due to leave the office and he did promptly. And as a result, we, john sifford, one of the great trial lawyers of the office came in and tried the case, okay well thank well thank you for that sort of early, uh history, here, um, so as as as rusty, has said uh january, 1978. An indictment, is filed, vincent ciarrella. Hired, stanley, arkhan, as his attorney, to defend, against, the criminal, securities. Fraud. Charges. In a recent, interview. Stanley, shared with me his recollections. Of his initial, impressions. Of the case. As well as his initial hope of potentially, resolving, the case without, a criminal, trial, so i'm delighted, to share with you all just a short video, clip now of that interview. And uh i remember, speaking to john. Shifford. About. Could we make a deal. I wanted a misdemeanor. And he was, very. Um, much against how i wouldn't do it. Nor would the people he worked with jed reikoff. Is now a federal, judge. He came along, he's a long time friend. And bob fiscal's, u.s attorney, was a long-time, friend. And, i remember, that. I. Was unable to persuade, him to move. And i thought to myself. This case. It's the first insider. Criminal, case. And, he's brought it on one theory. And. I remember speaking to mark harrison. It was. By then working for me. And we had a wonderful, experience, in poindexter.
Which Was an acquittal. I was considered. Acquittals. Third only. After my children. My marriage. And then acquittals. And. I. Remember. When the case came in that i. Had a first impression, which i shared with mark and we talked about it which was. Who was hurt. Who was her. Criminal case somebody should be heard. Now it's a civil case. And that, couldn't be used as a president, against you. I think it had been we would have lost for sure, lost all the way for sure. And, i realized. That. It would be a hard case to try, because. This man made money. By using. Somebody else's, information. And then i said to myself. And mark. How was that person hurt. Because he bought the open market. And, even though i do understand, that i learned this from you. That over half the volume. On a couple of days is when he bought his shares. But. I said, who did he set out to hurt and who had actually heard would have been a. Shareholder, who never would have known the difference and would have been an anonymous, shareholder. And so there was something there we could we we could, fight, about. And of course as i got more indications. A lot. And we got into the. Obligations. The. Uh. Way. You owed. A certain fealty. When you were in that area. But they saw how he was an open. And open channel. That just, somehow. What he did. At that time. Didn't make it a crime. And. I understand, that john, in his office. Had some time coming up with the theory they had near invading. So john, stanley's. Clip. Packed in, a lot of important information, so i'm. Eager, to ask you a host of questions, so, can you begin by telling us about your first encounter, with stanley, as chiarella's. Counsel. Two quick uh preludes, to that, um first. I have to tell you listening to professor, joy. Uh, every time, i hear someone talk about shirelle, i learn something new and thank you for the clarity, in which you said that i also, while thanking people who need to reiterate. Uh my thanks to the pawlik center. Uh at nyu. And to uh. The mauro, malware school of law at indiana university. And to the sec historical, society. For putting this on and for inviting me. Uh, and especially, donna for you and for your, perseverance. In putting this together. Um. My first encounter with stanley. Uh actually. Has dictated, a, 41-year. Friendship. Unlike any other that i have. In the law. We were in court. On the arraignment, i had inherited, the case from jack lowe as rusty. Explained. And, um. The judge turned to me and said, uh, mr sifford, what is your legal theory. For this novel, case. And i i. Essentially. Said what rusty said it was that. This is. Prohibited, it's material non-public, information. You either. Have a duty to disclose, or you abstain. Market is for equal access. That's our legal, theory. And he then turned to judge owen then turned to stanley and said mr arkin. I know you don't have to tell me. But. What is it would help me in devising. The charge of the jury what is your legal theory. And. Hesitating, for a moment stanley, said. Your honor it's the rachmanist. Defense. Now. Rahmonas. Is a yiddish, expression, for. Sympathy. Or compassion. And um. That was the end of the session as i remembered, it. I went back to my office, and about three hours later i get a call from stanley, saying. John you won't believe this. The law clerk. To judge owen just called me asking me for the citation, to united states against rachmanus. Why stanley thought that i. This. Uh, nice jewish boy who was taught not to look jewish or act jewish, would know what rachmonis, meant i don't know but he did and and, thereafter, i realized that stanley had this special quality to him. Where he could enjoy, a good laugh. And when he came to me. Asking. For a misdemeanor. I guess, he didn't know me very well because, i in fact. Agreed with him, and i guess i played it very very straight, and uh, and camouflaged. It and i went to fisk i remember going quickly to the eighth, floor and saying.
Look, We have a novel theory. Um. Why don't we get a criminal, conviction. Uh, by by by guilty plea with misdemeanors, the first step. We have someone who is merely a printer. You know made only thirty thousand dollars for goodness sakes, had been earning twenty three thousand dollars or so a year. And. Um. Uh, we should go after the big guy and i think i've said harold gene and i t. And um, and and fisk then. With his methodical. And careful. Self. Said. Well there's really, overwhelming. Powerful. Evidence. Of, of. Of, misuse. And guilty knowledge. Here. Uh here we have. The printing industry, which was rampant. With, use misuse, of, of client information. There was, printers were stealing, information. Uh, it wasn't like overhearing. Information, at a football, game, the sec, had charged, a printing company, sorg. Was doing this before. They had, settled, sork had settled. Notices, had gone out to all of the sorg, employees. Other companies, adopted, those notices. And noticed that notified, their cut their their employees. At pandit press, their employees, knew that it was not only. Wrong to do against public, company policy it was wrong because the sec had charged it, uh we'll never get a the union had bought into this. Uh and sent out bulletins. Um. There would be no better case of notice. Uh. Than this, uh that it's wrong, and i think, once you get a conviction, here you can then go after harold janine. And that's the way i, that that meeting left. Um can i, talk to the next. Compacted, point that stanley, mentioned. Yes absolutely. Which was no one was harmed i mean, he argued that and i and i and i and i reviewed, the the summations. And in fact i said that's a smokescreen. What's the difference between someone taking a, a, gun and pointing at someone's head. That's pretty bad but is it. Because that's what he did it may have been anonymous. But he knew it was wrong, and, and and and it exposed, to the same risk, the the the selling. Public. So, so let's let's drill down a bit into the the government's. Legal theory so um. How, how then did you refute, this this idea, here, um that no one was harmed. Well i think in in. In the first case. Uh. What i did was i called witnesses. Who sold their stock. Uh and i, i, treated this kind of like a, junk case a two by junk case. Uh this was not a. Victimless, crime. Um. I mean let's let's, let's, contextualize. The. This situation. As. Rusty, said. We were dealing with katie roberts, and texas gulf sulphur, the sec, and the second circuit. The second circuit had made it clear. That misuse. Of material, non-public, information, for personal, gain. Was not permitted. And that a, traitor. Who has material, non-public, information. Must disclose, and if he can't for any reason if he's disabled. Then he must abstain. Um, and the analogy, that i had was that, possession, of mnpi. And material non-public, information, inside information. Was, like possessing, heroin. It was the same thing. All you had to do and in securities, law, the notion of fraud was very different than 1341. Or common law, there was a special duty as, katie roberts. Said. So if you are dealing with securities. The whole, purpose of the sec. The commission, was to, equalize, the playing field. Create equal access. And. Um. People would be hurt, if there was misuse, of confidential. Information. That they shouldn't be using for themselves. And and and and and, the fact that someone. Might have been, selling their stock anyway to buy, uh to repay their mortgage. Doesn't mean that they weren't hurt. Uh, uh they could have had more money to repay their mortgage had they known about that information, and waited three days.
Okay, So so as you started to frame, the case then, clearly. An argument, was that the, targets. Shareholders. The sellers. Who sold without, knowing, tender offer information. Were harmed. Who additionally. Was harmed, by chiarella's. Uh, actions. In the government's, view. Well, um. Stanley made a motion to dismiss. And in the motion dismiss, he said there was no duty. Owed. To the. To the, target, company. The company whose stock was traded. And, traditionally. When, misrepresentation. And omission, cases. You have to make a misstatement. About, the stock that you're trading in. What its value, is. Um. And. Uh we had, jack lowe had, had the indictment charging, three. Prongs. Of, the, of 10b5. He, he engaged in a scheme to the fraud. He made misrepresentations. Or omissions, of material, fact. And he. He devised, a scheme. Which had the, uh which operated as the fraud on the sellers. The last. Theme. Was. With prong had to do with the sellers, the first two. The second one was the statement, also to the sellers the first one did not. It did not mention. Who the target, who the victim was. Um. And. The defense theory was that he did not make a false statement. Um. And that he owe no duty to the issuing company. And. We essentially, conceded, that this was an omission case not a statement case. And in the end the judge, during the trial. Came to the conclusion, that in fact. It's a stretch, to say that. That that you could bring an omission case, in an anonymous, market. Because. Um. Uh, it's not clear that a, statement to a broker. Uh that i want to buy. Would impose a duty, down the line to the ultimate seller to disclose. So he struck. The, false statement case, and the the, misrepresentation. Of an or, or omission of a material, fact, part of the case and that never was submitted to the jury. So we had engaged in a fraud and operated as a fraud on the sellers. But in the. Motion to dismiss. Judge owen. Adopting, an argument i haven't been able to find my papers, but i imagine that i that that this was the theory we advanced. That judge owen. Adopted, it and said, that the fraud, was, on the sellers. And it operated. As a, fraud. On. The. Acquiring. Company. The, the, the panic press and panic press's, client. In effect he was saying that a victim. Was. Um. The victim that you would articulate, in a misappropriation. Theory. Yeah. And indeed there's, a written, opinion. That. Judge owen, issued, in refusing. To, dismiss. The indictment, at this point, and. I'm sorry jungkook. And he said just that and he said that and so in the charge to the jury at the end of the case we had submitted our charges in advance, of the trial. I submitted, in supplemental, charge, request, number two i think supplemental, goes number two which said. Uh, that that. Should stay, at as part of the chart slaying, the smart lawyer that he is said that that would be, an amendment, of. A an amendment of the indictment, it would be a variance, because the indictment, charge that operated as a fraud on the sellers. Yeah i, want to pause, there just just started, after that moment, um, because. As as we all know from the supreme. Court decision. Um the justices. Poured over those, jury instructions. And. The. Stated, reason that a majority. Of the supreme, court. Was not willing, at that time, in 1980. To. Endorse, or affirm. A so-called, misappropriation. Theory, when the fraud would have been on the acquiring. Companies. Uh when the fraud would have been on. Pantic, press. The reason, was because, there was no jury, instructions. Specifically. On the misappropriation. Charge. Exactly. So uh not, not, not through lacking, effort on your part it sounds like so. Don't give me too much credit because again i was dealing with a junk case i was dealing with material non-public, information, you can't sell, yeah.
Right. Why do you think that judge owen. I'm sorry. Why do you uh. Why do you speculate, or, can you please speculate, why, judge, owen. Did not allow that specific, instruction. To the jury. Because it was in his own opinion. Well because. What stanley, did was noted. That, the opinion, said. That there were two victims. Because it operated, as it was a fraud on the sellers not operated, as a fraud. On the acquiring, company. The indictment. Said. There was a fraud. No victim specified, and operated, as a fraud on the sellers. Okay, so. So i at the probing room conference, the charging conference, agreed, and said that, stan is actually right. The indictment, does say what he says it says so just, flip it just, omit. The. The, the acquiring, company, from the operators, of fraud, and ad put that with the first part, say that it was if he devised a scheme to defraud, the acquiring, company. Pandey press and its. Clients. And it operated as a fraud and the sellers, and you do operate as fraud to avoid the the duty issue you know. The omission, problem. And and uh. Judge owen basically. Didn't want to go there, because he saw. I think i'm speculating, that he said i'm more afraid. Of the. Variance. The mending of the indictment. Problem. Than i am of the legal theory because the legal theory clearly we were right i mean second circuit law, was that. This was verboten. And right was malin, and say as opposed to male and prohibitive. It was if you knew that it was narcotics. And you knew that it was wrong to do it you couldn't do it. And. And that that was that simple, yeah yeah well it's, so, uh. Interesting, the supreme, court. Um. Ended up agreeing, with stanley's. View, about, the fiduciary. Relationship. That was necessary. Between, the trader. And. The shareholders. Of the issuing corporation, but we have a while to go before getting to there, so, let's let's talk about, trial, preparation. Because. It's. The. As a law professor, i spend so much time with my students, in class, talking about these legal theories. Um, prosecuting. An insider, trading case or defending an insider trading case is sort of an altogether. Uh, different. Uh, uh. A very different aspect, that we often don't get a chance to share with our students, um, so it's uh january, 1978. Jack lowe, has. Presented the case to the grand jury successfully, gotten the indictment. And then leaves to go into private practice, and you get the file, and so why don't you take us from there in terms of the, evidentiary. Gathering. And, um how you went about actually, proving, your legal theory. Well. There's a difference between legal theory and themes. Okay. And and and. One of the clear, themes, from the get-go, for the defense, was that he had no scienter, he did not have an intent to defraud. So. Um. What i teach my students at nyu is you have to think backwards start with the jury instructions. Then look for the evidence then write your summation that you'd like to be able to write and then try to find the evidence that would back it up. Uh. So that's what i did here i i, i, i started with what the elements were and i had it from texas gulf sulfur. Really simple. And. What i needed then was the state of mind. Common law fraud. Wire fraud required an intent to harm. Uh. Securities, fraud. Didn't. In the second circuit. Dixon, and pelts were two cases which said you had to know that what you were doing, was wrong, wrong knowingly wrongful misconduct. That's what was required, in the circuit. So uh and stanley was arguing that ernst. Again hockfilter, which was a civil case, uh, required, an intent to defraud. We were able to persuade judge owen that in fact. That did not apply. Because. All it was saying was that negligence, was not enough. And the trial. Preparation. Had to do with, this, issue, mostly, which was. Did he know that it was wrong. And that's, what. The bulk of my work was doing. The, the file i got was very very skinny, and, uh the theory was as as, professor, choi said is that. That that that shirella. Was the markup, man. In this printing house. And what as a markup man he did was she would get, a proposed. Tender offer material. Document. And it omitted. The the name. Of the target. It also. Because in those days it was line. Type. Like we have computers, now, they had to leave the exact number of spaces, open, to match the number of letters of the target company.
When They were omitting, it so that they could just slip in the name. And, but it did contain. Other information, such as the volume. The highs and lows of the stock in the prior year the market it traded, on, and things like that. And. Uh. What i was told. That the sec had determined. Uh was that he had figured out he had used those clues. To figure out. Who which company, the target was, and those are the stocks that he purchased, in advance, in his own name and in his father's, name. Um. So, uh i i i could not believe that i i just, thought that that was. A croc i thought, nobody, is going to sit in a room. And do that, and figure it out. And use those clues. Which i am told by stanley, is what he thought it was. Uh and that's, apparently what his hobby was i didn't know that. Um. Uh what what wally news they took to the the. The courtroom every day. Uh opera news with him, um. Uh he had that under his arm and he read it during the trial. Um. But but but what what i what i what i what i thought was that, someplace, along the line, the lawyers, must have slipped in the actual name and that's what he figured out. Pandit press was a very computerized. Company. So, it had digitized. The, date and time stamps, for every. Document, that shirelle, ever saw the pandik press ever had and that shirelle, ever worked on you could coordinate. What he saw what he worked on and what was there. And. By the end of the day we had a mountain of documents, from shirella. From pandit press that carmen aselta, the sec, investigator. Had had obtained. For from them for me. And indeed. Cyril, had figured it out to my, punishment. Um. And. Uh, in the course of this i had discovered. That, uh he had applied. For unemployment, insurance, and and martin who is one of, the the great uh, people, uh working on this uh behind the scenes that nobody ever, sees, uh would you put up uh number 12 please. So i obtained, i learned that he had applied for and gotten. Uh. Unemployment, insurance, and. In his application. Which i got. Was, this, uh statement which says i was discharged. For violating. The company, rule. Uh, ray or about disclosure. Of client, information. The allegation. Is true. And, um, it goes on to say that, that had to. Do. With uh, uh, a matter of, printing. Uh. Stock, tender offers and i utilized, information for myself. This happened, last, year. Although. Through an investigation, by the sec. And, um so you can take that down martin, so so, here is a confession. That i i i, i knew when i and i turned i think was the i got it the week before the trial.
Turned It over to stanley he said well there's a, a a a, a um. A state law that says. Uh. That that's confidential. That was an issue whether that should have been suppressed, it should have been. Admitted into evidence. Or not and that was one of stanley's, i think the second issue on appeal. Um. And that of course has gotten totally, lost in the shuffle here, nobody ever thinks about that. Uh as part of this case. Um. Uh i also was able to, find an employee. Who had, uh to whom. Shirelle, had confessed. About what he had done. And stanley. Being the compassionate. Man that he is um. And his client agreeing. Agreed not to require, that, compatriot, of. Shirella, to testify, and so we stipulated, as to his testimony. Okay, um so there really was not much dispute, about what happened. The issue was, how could i make. K, of his state of mind, right, so. One of the things i did was offering, some evidence in the affirmative, case. An exhibit, which uh martin if you could put up 14a. Which was. A notice. And this notice. Uh. Was above the punching clock. Uh now stanley's. Theme. In his opening, and uh. Throughout the trial across, was that he thought that this was. Against company policy, but company policy. Can't be criminalized. And he didn't know that it was a crime well. It does say that this is. Pandik's. Property, and it's. Personal, it can't be used, uh. And it's pri. It belongs to the customer. And you're forbidden. It sounds very much like a company policy and then you go on says but in addition. You're liable to criminal penalties, with five years in jails and ten thousand dollar fine for each offense. Now until yesterday, i thought that that was an accurate description. Of, uh the securities, laws, well uh, a, professor, named nahi. Pointed out to me yesterday. That in fact. At the time. The fine for an sec, offense. Was not ten thousand dollars. Um i don't know what it was exactly, but but but, um. If she's right. The person writing this, wasn't, uh. Uh, one of the top. Criminal defense lawyers who had graduated, from the. The securities, fraud unit that rusty ran, um. Well the ten thousand dollars was a wire fraud, um. Could could be linked to mail fraud and wire fraud i believe it was a hundred thousand dollars was the top fine, for. Uh securities, fraud now that's a top fine, um but yeah. Quite interesting. Um, one of the things i'd love to know is who canceled. Either pantic, press or the sword, printing. In printing, no pun intended, their sign.
And So. We will. See there's there's ever more research, to do, but i know that time, john, is running, short and so i i i'd like, uh to, talk a little bit more about, maybe your, your closing, statements. To the, jury. And, um. Because you were successful. In convincing. The jury, um to find. Guilty. On, every, count. Well the the the the, summation, largely, was a recap of my cross, which essentially, was that, that you know he tried to present. A sympathetic. Picture of having lost his job, after 20 years. His wife had died his sister was disabled, his father was unemployed, he earned 23, 000, a year. And, know stanley said you're going to make him a felon 17, times over, uh, that doesn't seem quite right. So. I had to, to kind of uh pull the teeth on the sympathy. And the way to do that, was, uh to point out that. He was. When he testified, on direct that he only thought it was against company policies that that wasn't true, and i started with the sign. And i said and we established that it was up for 640. Times. And, through, wonderful. Uh, cross-examination. Really textbook where you don't care whether the witness is yes or no. Because if he says yes he confesses, and if he says no he's not believable. He said no he said i never read it once. And, at that, that's what the judge found. Constituted, perjury, beyond a reasonable, doubt, and said and for that reason he was saying. Yeah that that's, 640. Times, passing, the sign and the time clock, makes it into, the second circuit opinion, the supreme court opinion so that was uh clearly. Something that uh. All of the judges, and justices. Who considered, the facts, um look to. One minute i have i would say the other the other feature here is that. Is that. Uh, he. Burst, he he ejaculated. The notion of inside information. He said that, what he was accused, of. In the unemployment, insurance, was violating, inside information. That, was a term that stanley, had prevented, me from being able to mention at the trial, so it came out for the first time through him. And through a series of cross-examinations. He ended up having to confess that he knew that that was a wall street securities, firm and in the end after a bunch of back and forth and resisting he confessed. That he knew that it was wrong against the sec, and not just against company policy. What he never said. Was that i knew. That. That the company thought it was against. Against the law, but i disagreed. And that would have been more difficult, for me, to deal with but he never said that yeah no interesting, that a sign says, if you do this you can be criminally, prosecuted. But there had never been. Um at least under the federal securities, laws, or even under mail and wire fraud, a, securities. Fraud case. For the use of material, non-public, information. And the, bottom line is he was saying. Uh i only knew he was against company policy, i never knew it was wrong, and i was able to argue, he disregarded. By shooting the bullet into the skyline movie theater he disregarded. The harm it was causing, and it was deliberate. So it was a deliberate, disregard. For the harm he was causing. So stanley, tried to make a. Fiduciary-based. Argument. Involving. No relationship. Between. Tiarella, and the selling shareholders. Judge owen, did not accept, that, and. The case goes, to the jury the jury votes to convict chiarella, for securities, fraud on every count. Um judge owen then sentences. Giarella. To one month in prison. And, five, years, of probation. Um. So rusty i want to get you back into the conversation. Here so it's it's april, 1978. Um, you were building, a criminal, defense, practice, focused, on white collar. Crime. Um what do you recall, about the white collar, criminal defense.
Bar's, Reaction. To, chiarella's. Conviction. And, prison sentence. I. I don't really recall. That other than i can assume. Defense, lawyers white collar defense, lawyers, were looking forward to more business. If there were going to be criminal prosecutions. Of people. Who normally, engage in insider, trading, who normally, can afford good lawyers. And that was probably, a plus and, as a. As a former, prosecutor, i was happy that the case. Turned out the way it turned out. Uh sure that uh typical, defendants. Um. Might not. Just. Yeah and and and what happened later stanley, made a great argument in the supreme court the supreme, court, in a very divided. Set of opinions. Upheld. Mr chiarillo's. Um. Rather, reverse the conviction. And. Although. Some of the uh concurring, or dissenting, opinions. Were very helpful, in laying the groundwork. For future, prosecutions. Under a misappropriation. Theory. Absolutely. And actually our second panel is going to be focusing, on that but before, before we get there, um we have, the second circuit, then heard, uh chiarella's. Appeal. In october, 1978. Um, because. Stanley, on behalf of his clients sought an appeal, of the prison, sentence, and, the conviction. The second circuit, panel, voted, 2-1, to affirm, the conviction. Interestingly. Judge, kaufman's. Majority. Opinion. Stepped, away, a bit from the broad well. Perhaps, even more than a bit from the broader, equal, access, theory. Of rule 10b5. Disclosure. As. Professor, choi, at the outset. Explained. The second, circuit. Replaced. A broad, equal, access, with a more limited, obligation. Applicable. To only those who regularly. Received. Market, sensitive. Information. Um so john you were the successful. Arguer. Before this second circuit. Um i i really want to get to the supreme, court, argument, but but one question about the second circuit, appeal. In. The questions. By the second circuit. Judges. Were you able to sense the reframing. In this regular. Access. Type, argument. A narrowing, of equal, access, to, regular, access, or structural. Access. I had no, i have no recollection, of thinking that i talked to rick weinberg, who was my classmate, and my supervisor.
On The appeal. He was i think chief for deputy chief, of the appellate, section. And and, rick, said that all he remembers, from the argument is walking away thinking that we had won, oh okay well. He did, and stanley, told me he walked away thinking that he had one vote for in his favor. I have no memory other than thinking, i did the best i could, well it was a 2-1 decision, mescal, did, uh side, with. With stanley, but um, you had uh you had the majority. Uh the bottom line, at least to chiarella. And to stanley, and to the prosecutors. Was that chiarella's, prison sentence was upheld. Unless, an extraordinary. Event. Were to intervene. Um, and in my recent interview with stanley. He shared with me his reasons, for pushing, on. And seeking a review, of chiarella's. Criminal conviction, by the u.s supreme court typically, at the appellate, level. If you lose, your, client. Sadly. Goes to prison. But stanley. Didn't take no for an answer and so i'd like to share some video, discussions. Of the reasoning. I i, um. In my career. Of 57. Or 58, years. Uh. I always had the sensibility. That you. Never stop fighting. Unless there's nothing there to fight about, and i felt here. There was something. Worth fighting, well. It was the first case of its type which of course gave me. Some. Encouragement. In going to a higher court. And, a certified. Petition. Was not so difficult, to prepare. Even if it had what we would have done. And i will tell you this so, and for anybody else. You don't expect, to get certified. Almost nobody ever expects, it. Except in rare cases. Here i thought, probably wasn't much chance but there might be some i remember, thinking to myself. It was interesting, enough. To catch my mind, and that of. Many of my colleagues. Other people who do defense, work and other lawyers, i know. And so well interesting to them to me. Maybe, interesting to the court. And with preparing, a certain repetition. Two or three days of hard work. And mark harrison. And i did that together. And he. Is and was a wonderful, lawyer, and a great help. So i find that fascinating, for a host of reasons i've never prepared, a cert petition, i've written amicus, briefs and i can tell you it took me a whole bunch longer than two or three, days. For my amicus, briefs. Anyway. The supreme, court granted, the cert petition. In, 1979. And, the government. Is now being represented. At the supreme court by the solicitor, general's, office of the department, of justice. From his, sec. Historical. Society. Oral, history. We know it was frank, easter brook, then, deputy, solicitor, general. Who raised, objections. To the government's, equal, access, approach, to. 10b5. Insider, trading liability. Um judge easter, who was deputy, solicitor, general easter brook then wasn't a fan, either, of the second circuit's, regular, receipt, narrowing, either. The office. Opted, to go, all in, with, a misappropriation. Approach. That is assistant, solicitor. General stephen, shapiro. And the sec's. Paul gonson. Work together, to frame the arguments. To center, on two, misappropriation. Theories. First, chiarella, violated, rule 10b5. By defrauding. Both the acquiring. Companies. Whose information, he converted. So that was, one, as well. As the investors. Who sold their shares in the target, companies. Without informational. Advantage, that chiarella, had wrongfully, obtained, through misappropriation. So whereas caveat, emptor might be the usual, rule if you steal, information. You can't, use, it. To your advantage. So that was the government's. Theory, um, up to the supreme, court. Um and so john. As you think about it what comes to mind, when. You. Recollect. The government's. Merit brief, and in particular, steve shapiro's. Supreme, court oral argument. I can tell you that, i was. Just in awe of steve. He was a brilliant, kind. Generous, man. And his loss, uh, is with us today. He um, he um. It's unusual, for an assistant u.s attorney to be asked to participate. In the brief writing. It's unusual, for an assistant u.s attorney's, name to be on the brief. Or to be asked to sit at council table in the supreme, court steve, did that, for me. And took me seriously. To this day i don't know why, he was just, generous to a fault, and he was brilliant in the argument. And he wore tails and i did not. Well as i was working on this essay, i've, heard just such, extraordinary. Memories, of steve shapiro. Um. His his brilliance. Uh his kindness, his inspiration. Um, but i have i have one final. Clip, to, share with, all of you, from my recent, interview with stanley. When he talks about, his reaction. To the government's. Decision. To go, all in with the misappropriation. Theory, and so uh we have one final claim. I've always had, in mine, is my entire, career. Over half century which is. You can't. Commit. Somebody, to jail, a potential, jail. Based on an afterthought. If you don't get it right in an indictment.
And So be it, maybe bad for society. But. It's better for society. That you have a predictable, legal system. And that's, one was waxed and waned. Depending, on. Where you were at the time. Put another way. If you try the case at the district level. That's the stereotype, in february now. You can't change it on circuit level. You certainly can change the supreme court level. You do it the first time around. Or you got to do it again. In your next case. Well and stanley, ultimately. Uh the supreme court did agree with you there. So uh. Stanley, if you. Turn your camera. On now. Um. It it would be. It. Would be wonderful. To hear. Directly. From you. On this question. Your, your oral argument. To the us supreme, court. Was on november, 5th, 1979. Which, is, exactly. 41, years ago today, um. Extraordinary. Coincidence. Because, when. We set our webinar, date, we did not have that, in mind, um. Can you describe. For, us how, it felt 41, years ago, to be arguing. Your client's. Case, before the nine justices. On the u.s supreme, court. I felt very privileged. And we have a wonderful, system in this country. And. The supreme court of course is. The. Main. And most important, court in the land in terms of. Developing, legal policy, and. Legal rules. I was, very happy to do it, um. I remember the day. Very very well because. I had with me. Observing, the argument. What were then my three little boys, and my wife. And it was a beautiful, day in washington. And i just felt good about the argument. I didn't. If you will. Plan. Or. Divine, that i would win it but i thought i had a shot. And i had great fun in the argument. And my adversary, was a well-spoken. Articulate, fellow as well. Shakiro. And i thought the argument went very very well. And. I also will say to you that, um. I've never really been very nervous in a courtroom. And i thought i might be there i was not it was a. Just a. Wonderful. Professional. Experience. And also made me feel very good about this country again, because i knew elvis every day. I mean every day except maybe lately in the last few, few weeks with what's going on. But this is a wonderful, place to be. We built a wonderful society, and legal system. And just one more thing to say she said sure. I've been i've been practicing. Uh, criminal, on other kinds of difficult, cases, for. More than half a century. All over the country and i went all over the world. And i got cases, really. Everywhere. And interesting, cases. And, one impression, i have i should share with you is. Randy, and john over there that. Never dealt with an office anywhere in the country. Our law enforcement, group anywhere else in the world. Which had as uniformly. Talented. Good people, as a southern district of new york. Now there are some exceptions, i can recall, but i won't mention, those. But as an organization. As a law enforcement, group. It's one to be proud of in our country they are just an excellent group of john. And rusty. The wonderful, lawyers they are. Are among those graduates, i am one of the few people in town. Whom i would say practiced. And have practiced, still. Successfully. Happily, with marvelous, cases. I never was a prosecutor. Except in one limited, area which, my mother mentioned where i was retained, by the court to. Pursue some bad people. But. It was an experience. Which. From start to finish. Was one which was a very satisfying, one professionally. Vincent, was not a bad man. Vincent, was a. Sweethearted. Man who made little money. And i think that he, first looked at this as kind of a game. He knew it was wrong. And it was wrong from start to finish. And by the way i wish to leave you with one thought. This is no reflection, of my good friend john or rusty or anybody else. I never understood, why they charged it the way they did. Would have been very simple to charges, as a mail fraud and misappropriation. We would have none would have been no appeal. Um, but then all of, our securities, regulation. Professors, would not have, uh. Chiarella, versus, united, states, as one of our, our key cases, it would have been a criminal law case in a white-collar, crime class.
Rather Than, a securities. Fraud case, in securities, regulation. Um. I, will say having listened, to the oral argument, and for our viewers, out there it's easily, accessible. Just. Googling, oral argument. Giarello. Will bring you to. Various, websites. Stanley's, argument, was brilliant. Stephen, shapiro's. Argument, was brilliant. Um. The, supreme, court, uh. Stanley managed to convince, six of the justices. To vote in favor of reversing, chiarella's. Conviction. Um, and. Uh, five of those justices. Uh squarely. Supported. Um, the, the. Fiduciary-based. View. That one needs, a. Disclosure. Duty that is based on a fiduciary. Relationship. Of trust and confidence. Um. So, stanley, you you didn't convince, uh, judge owen of that at the district court level and you didn't convince, the second circuit, but when the going uh was all important. Um you won the case, on behalf, of your client. Um we know that the jury, instructions. John that you tried, to get in were not given because of judge, owens. Decision, making, um, regarding. What could have been a misappropriation. Theory. And so we have only, about a minute left rusty, i i'll just, sort of go back to you on the last word, and you sort of. Um, you alluded, to this, in your last statement. Um, that. As one of the criminal prosecutors, who initiated, the case, the case is now reversed. By the supreme, court. Um. What what was your thinking at the time. You never feel good. When you think, a case that should. Should have, gone all away. And the conviction, upheld, doesn't do that particularly, when it's a case. Where you're essentially, making new law or trying to do it and you think you're right. So, you obviously, you don't like it bob. Saying, we won the case. In the district court and the solicitor, lost it, i'm not sure you couldn't also, say. Judge, ward, um, judge owen not judge warren judge owen lost it, because. His opinion. Dismissing. Stanley's, pre-trial, motion. To, to. Dismiss, the indictment. Focused, on the fact that this was an embezzlement. From. The acquiring. Company, essentially. And although you could argue about whether there was sufficient, language, in the indictment. I think in his ruling, initially, he found there was sufficient. Language in the indictment, to cover the misappropriation. Theory. Pandec, press all the way up to the acquiring, companies. And so maybe he was the one who lost it for us all, but stanley, did a great job john did a great job, and you and running this have done a terrific, job. Well thank you thank you so much rusty i should say that chief justice, berger. Found the jury, instructions. Did cover, misappropriation. And chief justice, berger, and justice, marshall, and justice blackman. Would would have. Would have found, the. Jury. Sufficient. Charges. To affirm the conviction. Um. So, um well i truly, wish, we had another, hour to continue, this conversation.
Um. I could probably spend the rest of the day, talking with john, and rusty. And stanley. But we have three additional, panelists. Planning to talk about their roles, in sec. And doj, enforcement, strategies. In the wake of the chiarella, decision. Professor. Robert thompson, of georgetown, university, law center will be the second panel moderator. So. With, tremendous. And with heartfelt. Thank you to. Stanley. And to rusty. And to john. Uh, from. All of us um. I'll now turn, this webinar. Over to bob. Thank you. Thanks donna. You've done a wonderful, job of putting together this program with steve choi and the pollock center. And jane cobb and the sec historical, society. You made it possible, to preserve, the story of this pivotal, point, in the development, of law of insider, trading and we're all we all benefit. Uh, our. Our three participants. For this panel, had key roles, in that shirella. Saga. While they were still in their 30s. And for one even earlier. I think he was 12.. And we've all had distinguished, careers, in there in three different parts of the securities. Legal world. Some something like the butcher the baker and the candlestick, maker of children's, nursery, rhymes. Don langvort, took the academic, route. He is the thomas aquinas reynolds professor of law at georgetown. Widely, acknowledged. As the go-to, scholar, among, all those writing on insider, trading. At the time covered by our story, this morning. He, had, come, from harvard and louis lost his class on the federal securities, code, to wilma cutler. And then. To the general counsel's, office, at the sec. Lee richards who will go second in our panel. Was an assistant. United states attorney for the southern district in new york, and he tried the newman case soon after, giorella, decision. That. Became, the center point for working, out, what the reshaped. World, of insider, trading would look like. He left the prosecutor's, office for private practice starting his own form, firm richards could be an orbee. Uh for a practice that truly merits the lifetime, achievement, award that he was awarded, from the new york law journal. Jed raykoff, illustrates, the judicial, path of the post-shierella. Time. As the federal judge in the southern district of new york, he has decided, important, questions, of war and peace.
But More relevant to our topic, he has written more decisions, on insider, trading than any other judge, of our time. At the time of our story. He was head of the fraud unit of the u.s attorney's, office. For the southern district, succeeding, rusty. That time span. Covers, the chiro, trial itself. Uh as well as the newman trial that we'll talk about here. In the interim between his time as a prosecutor. And his time as the judge. He was in private practice, which took him into another, branch of key insider trading cases, us versus carpenter. And in which he was on the descent, he was on the defense side. So we have a real, treat, uh, in store for us at this time. Uh, as the curtain rises. For what will be. At two. The non-road. Justices, have handed down. Their decision, in the marvel temple. On east capital. And first street. And the scene and the scene shifts a few blocks, across, town. To a, more pedestrian. Office building. Where the sec. Moves into, immediate, action. And that's where, don picks up the story. Okay, uh thank you very much and, it's pleasure to be here, uh i should say i was officially, junior, at the time, that my recollections. Today, are very much. Fly on the wall recollections. Um but it was a privilege, to be able to be in on this discussion, of insider trading. As it emerged, i want to go back a couple of years before i come to. The question. Bob posed. You heard. In panel number one. That the criminal prosecution. Um. Of vincent chiarella. Drew heavily. From, texas gulf sulfur, and the notion of parity, of information, parity. Um. Equality. Um. And that is, indeed, the case. Um. At the sec. However. Shortly. After, texas, gulf sulfur. There came a recognition. That that would be, a dangerous. And somewhat misleading. Theory. On which to proceed. And you find nothing. In. The decade, before the supreme court tiarella's, decision. That shows a strong. Sec. Embrace, of it in fact in 1976. Phil loomis, who had argued, texas, golf sulfur. And was then, general counsel, of the sec. Gave a speech to an investment, analyst society. Saying, equality, of access. Is both, bad law, and bad policy. And no one, understanding. The securities, markets. Could think that by itself. Um. Would suffice. As, a theory. Uh unfortunately. The. Sec. Was not communicating. That terribly, well. Uh, as opposed. Apart from behind, closed doors. Um so for the. Remainder. Of. The decade. The sec, was at work trying to figure out. A better way of articulating. Um. A duty-based. Way. And so it was something of a slap, when the supreme, court. Ultimately. Says, we could not decide, this case. Without, creating. A parody, of information. Regime. Which we are not prepared to do. In fact lots. Of. Brilliant, minds. Had been working, on exactly, how to do that. And frankly. Um, and. Judge rakoff, will no doubt get into this. Had come to the conclusion. That. Maybe it would be better, if we had a statutory. Or rule-based. Articulation. Of the, prohibition. Rather than continuing. Going on with. The open-ended. 10b5. A b and c. Um. That. Had been, the law, a lot of this was driven by. Louis loss. And, the group that was. Formed. Under the auspices, of the american law institute. To create a federal securities, code. A piece of legislation. That would substitute. For all the open-endedness. That was being baked into securities, regulation. And loss and milton cohen, and, the brilliant, minds. That were pushing that. Had come to the collusion you can't have insider, trading. Without, legislation.
Or At least. Some template, that goes beyond. Don't engage, in fraud. Um. So the sec. Had actually spent, a lot of time, in the latter, half, of. The 70s. Working, on potential, legislation. Trying to find, a way of articulating. All of this. And as. The drafters, of the code came closer, to having a work product. That they wanted the sec to endorse. Um. That was becoming, a more pressing, issue. But there was one. Strong. Voice, standing, in opposition, and that was stanley sporkin. Who was director, of the division of enforcement. Was very. Opposed. To any form, of articulation. Legislation. That, could be used to tie the hands of the sec, enforcement, division. Stanley, as i recall wasn't, actually. Um. Dedicated. To, parody, of information. So much as he liked the language, of 10b5. Just as it was. And didn't want anybody. Coming up with alternatives. That would be more specific. Um. That would, tie the hands, and thus. For a variety, of reasons. We never, quite, got to the place. That judge rakoff, has. So many times. Urged. Um. Of legislation. That would substitute. For the judicial, decision, making, now to answer your question which i could do much more quickly. Um. The day. Ciarella, came down. Um. I had been. Working on the ali, code project, involved in the negotiations. About what insider, trading should look like. Uh so i was. Sort of brought into the working, group, on. What do we do now. At the time. And this is mentioned in the supreme court's opinion, the sec. Had a rulemaking, proposal. Out. To use section 14, of the williams, act, to create a specific. Tender, offer, rule. That was proposed. It hadn't been acted on. And. Inside, the building. With again stanley, sporkin. Being. The instigator. There was opposition. To, that, form of articulation. So it was just hanging, out there and it wasn't. Gathering, steam. Inside the agency. Then of course. The opinion, of the supreme court comes, down, and. Now. Insider, trading, has been collapsed. To something, smaller, than it used to be, a fiduciary-based. Theory of liability. Uh, what to do now. Um. The answer. Uh which we came up with in about a week. Was. A proposal, that we were prepared, in the general counsel's, office. To bring to the commission. Called 10bx. At least as its nickname. Uh, which would be an immediate. Rule. To codify, the misappropriation. Theory of liability. Plus the what we now know is the classical, theory of liability. To bring. Into, a, presumably. Enforceable, rule. On, both. The. Um. Burger, theory. And. Um. The stephen's, theory, of. Liability. Um. We brought that forward. And. Inside, the building. Was, a cacaphony. Of. Disagreement. Corpfin, wanted their, 14e. Rule, which was crafted. In ways that made enforcement. Furious. Um, general counsel was saying, we've got an opportunity, justice, powell has said one of the problems, here is. You haven't