Scalia invites criminal defendants to challenge SEC authority

November 12, 2014

Does the Securities and Exchange Commission have the right to define when someone who trades on insider information has committed a crime? Or is the SEC – and, for that matter, every other executive-branch agency – treading on Congress’s toes when it adopts rules interpreting laws with both criminal and regulatory implications?

In an unusual statement at the end of Monday’s U.S. Supreme Court order list, Justice Antonin Scalia questioned whether federal courts should pay deference in criminal cases to statutory interpretations by agencies such as the SEC, even if those interpretations are urged by prosecutors. “I doubt the government’s pretensions to deference,” wrote Scalia, who was joined in the statement by Justice Clarence Thomas. “They collide with the norm that legislatures, not executive officers, define crimes.” (I first read a report of the statement at Law360.)

Even when there is ambiguity in a statute, Scalia said, it is not supposed to be the prerogative of administrative agencies to decide what constitutes a crime, considering that the “rule of lenity” requires ambiguity to be resolved in favor of criminal defendants. And despite the U.S. Supreme Court’s famous 1984 Chevron decision on deference to executive-branch agencies’ interpretation of the laws they administer, Scalia wrote, courts should not defer to agencies in construing criminal laws.

The Supreme Court refused to take the case that prompted Scalia’s statement, an appeal by former investment manager Douglas Whitman of his 2012 conviction on insider trading charges in federal court in Manhattan. Scalia noted that Whitman’s lawyers at Sidley Austin hadn’t specifically presented the question of whether the 2nd U.S. Circuit Court of Appeals improperly deferred to the SEC when it affirmed Whitman’s conviction last February. But he said he’d be “receptive” to granting cert if another case raised the issue. (There’s reason to believe that the Supreme Court thought hard about taking Whitman’s case, which was first distributed for conference on Oct. 10 and was rescheduled three times before the justices denied cert.)

If the eventual challenge to federal agency authority comes from an insider trading defendant, it will probably be someone who was convicted in the 2nd Circuit. As Northwestern law professor Allan Horwich wrote in an amicus brief supporting Whitman’s cert petition, only the 2nd Circuit uses the expansive definition of insider trading that the SEC adopted in 2000. Under that rule, as long as defendants trade when they’re aware of confidential and material information, they’re engaged in insider trading. Other federal circuit courts, Horwich said, require the government to show that the allegedly illegal trades were actually prompted by inside information.

The 2nd Circuit explicitly said in its 2008 opinion in U.S. v. Royer that the SEC’s rule is entitled to deference under the Chevron standard (although the court also pointed out that the SEC regulation adopted its “knowing possession” standard after the 2nd Circuit suggested just that in dicta in a 1993 case). In his appeal, Whitman argued that the 2nd Circuit standard was too low and that jurors should have been instructed not to convict unless they found that government had proved Whitman traded on the basis of confidential information.

The 2nd Circuit’s opinion in the Whitman case didn’t mention deference to the SEC rule, merely pointing to its previous decision in the 2008 Royer opinion. Whitman’s cert petition mentioned deference only in a footnote arguing that the SEC rule is contrary to securities fraud law and Supreme Court precedent.

The government’s opposition to Whitman’s Supreme Court filing seems to have sparked Scalia’s interest in the deference question. The Justice Department argued that the SEC rule should guide the definition even of criminal insider trading, and that circuits with different standards “will be required to reexamine the issue in light of the deference owed to the expert agency Congress has charged with implementing” securities laws.

Not according to Justices Scalia and Thomas. Here’s hoping that a defendant other than Whitman tees up the deference question so we can see how the solicitor general’s office will respond to the justices’ doubts.

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