[Congressional Record (Bound Edition), Volume 161 (2015), Part 3]
[Senate]
[Pages 3447-3448]
[From the U.S. Government Publishing Office, www.gpo.gov]




          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. REED (for himself and Mr. Menendez):
  S. 702. A bill to strengthen the prohibitions on insider trading, and 
for other purposes; to the Committee on Banking, Housing, and Urban 
Affairs.
  Mr. REED. Mr. President, I am joined by Senator Menendez in 
introducing the Stop Illegal Insider Trading Act to finally define the 
offense of insider trading. The need for this legislation is long 
overdue because, in the absence of a statutory definition, an 
inconsistent and complicated body of common law has developed as the 
courts have used varying interpretations of anti-fraud statutes in 
order to decide insider trading cases.
  For illustrative purposes, consider the following example. A 
financial analyst receives information from an insider at XYZ 
Corporation, which contains XYZ's earnings before this information is 
publicly released. This analyst then shares this inside information 
with his portfolio manager who subsequently trades in XYZ stock.
  Based on this hypothetical, I suspect most Americans would be 
skeptical about someone who learned of a company's earnings before this 
information was publicly released and then subsequently traded on such 
information. Indeed, I believe most would agree that such a person was 
given an unfair advantage in our securities markets.
  However, on December 10, 2014, the United States Court of Appeals for 
the Second Circuit in United States v. Newman decided that the 
portfolio managers in this case were not guilty of insider trading 
because as the New York Times summarized it, ``prosecutors had to show 
that both men knew that the original source of the inside information 
had breached a fiduciary duty and had received a personal benefit in 
return.''
  This decision defies common sense. It should not matter whether 
someone, who traded on material information that was not publicly 
available, knew whether the source of such information breached a 
fiduciary duty and additionally received a personal benefit in return 
for sharing this inside information. Such a decision is one of many 
that has caused too many of our citizens to lose faith in government 
and our courts. Indeed, some prosecutors have noted that the Second 
Circuit's decision in Newman ``might make it difficult to file charges 
against a parent who passes on a confidential stock tip to one of his 
children without receiving anything in return.'' This is plainly not 
right and contributes to a larger sense of injustice.

[[Page 3448]]

  The greater irony, however, is that those who deal with insider 
trading law the most agree that something must be done to restore 
reason.
  For example, Duke Law School Professor James D. Cox noted that ``all 
studies of significant corporate events document that a significant 
portion of the market movement associated with corporate events occurs 
before the event is announced; for example, forty to fifty percent of 
the price gain associated with a merger or takeover occurs before the 
transaction's announcement . . . One can thus surmise not only that 
corporate insiders are not very good about keeping secrets, but that 
their tippees are delighted that they do not. That is, remote tippees 
are likely both pervasive and truly are insidious. Newman pours gas 
onto this raging fire.''
  Most ironically, Judge Barrington Parker of the Second Circuit Court 
of Appeals who delivered the Newman opinion remarked during oral 
arguments, ``I'm concerned the government's position on key points of 
the law seems to vary based depending on which judge you're talking 
to.''
  Moreover, University of North Carolina Law School Professor Thomas 
Lee Hazen recently stated, ``no matter how narrow or broad people 
believe the definition of insider trading should be, virtually everyone 
is now in agreement that we'd be a lot better off if Congress would 
simply bite the bullet and define it . . . the situation is a mess. 
That's how you end up with cases like Newman.''
  This is precisely what Senator Menendez and I are doing in 
introducing this legislation today. We are seeking to finally define 
the offense of insider trading with a clear and simple bright line 
rule. Simply put, if a person trades a security on the basis of 
material information that the person knows or has reason to know is not 
publicly available, then they have engaged in unlawful insider trading.
  Under our legislation, it is irrelevant whether the trader knew of 
the source's fiduciary duty or whether the source derived any personal 
benefit. What matters is whether the trader knew or has reason to know 
that such trader had an unfair advantage in being given material 
information that was not shared with the broader public. In addition, 
we have taken care to ensure that those who take the time to 
independently develop their own information from publicly available 
sources can trade on this independently developed information so that 
publicly available information can be analyzed and interpreted without 
fear of liability. Lastly, because there may be situations that do not 
necessarily rise to the level of unlawful insider trading, we have 
provided the Securities and Exchange Commission with the flexibility to 
provide exemptions from insider trading liability as long as such 
exemptions are necessary or appropriate in the public interest and 
consistent with the protection of investors.
  In short, by making it an offense for those who contribute to a 
securities market rigged in favor of the well connected, our 
legislation focuses on providing everyday investors with a fair shot at 
seeing some returns after investing their hard-earned savings. 
Incidents of insider trading, and the perceived pervasiveness of the 
practice, have for years served to validate the public's worst 
assumptions about Wall Street culture. It is time we clearly define 
what is appropriate under the law and take this meaningful step towards 
improving the integrity of our securities markets for professional 
traders and amateur investors alike.
  I would like to thank Senator Menendez for working with me on this 
legislation. I also thank Public Citizen, Americans for Financial 
Reform, and the Consumer Federation of America for their support, and I 
urge our colleagues to join us in supporting the Stop Illegal Insider 
Trading Act.

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