Statements on Introduces Bills and Joint Resolutions

Floor Speech

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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.

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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