Professor John C. Coffee Jr. Advises on Insider Trading Legislation

New York, April 1, 2015—Columbia Law School Professor John C. Coffee Jr. assisted U.S. Representative Jim Himes (D-Conn) in his efforts to draft a statutory prohibition on insider trading. At present, insider trading is criminal, but the prohibition is defined entirely by judicial case law, and the federal appellate courts disagree on the prohibition’s parameters.

Himes’ bill, The Insider Trading Prohibition Act, makes it a federal crime to trade a security based on material, nonpublic information that was “wrongfully obtained.”
Himes introduced the bipartisan legislation on March 25 with Congressman Steve Womack (R-Ark). Although other bills have been introduced, this is the only bill with bipartisan sponsorship. Coffee emphasized that his role was only advisory and that most of the drafting was done by Himes’ “very able staff.”
Coffee said the legislation would close a loophole created in December 2014 by U.S. v. Newman, a decision by the U.S. Court of Appeals for the Second Circuit that reversed the insider trading convictions of two hedge fund managers because the government could not prove that the person receiving the inside information knew that the tipper received a personal benefit from the tippee for passing on the information.
To reverse that result, the Insider Trading Prohibition Act broadly defines “wrongfully obtained” information as that obtained through “theft, bribery, misrepresentation or espionage, a violation of any federal law protecting computer data or the intellectual property or privacy of computer users, conversion, misappropriation or other unauthorized and deceptive taking of such information, or a breach of any fiduciary duty or any other personal or other relationship of trust and confidence.”
“The bill updates the law to cover computer hacking and other newer forms of misappropriation but does not overcriminalize,” said Coffee, the Adolf A. Berle Professor of Law. “If you acquired the information by trick, stealth or bribery, you are in trouble, but not if you are simply at the end of a long chain of gossip. Unlike some other bills, the Himes bill allows security analysts and investment advisers to plan their affairs so that they do not unknowingly violate a criminal statute that has very shadowy edges. Congressman Himes’ draft is proof that a law can be written that is both tough and fair."