Did a Federal Appeals Court Judge Just Send a Warning Shot to the Feds on Insider Trading Crackdown?

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A concurrence by a brilliant judge on the 9th Circuit Court of Appeals may be a warning to federal authorities that they are over-stepping their bounds in pursuit of insider trading.

On the face of it, the concurrence has nothing to do with insider trading. Instead it involves the reversal of a jury verdict in a case where a CFO was criminally convicted of securities fraud by recognizing revenues in violation of GAAP. But it's hard not to notice that Judge Alex Kozinski's concurring opinion resonates with implications for the insider trading dragnet underway inside the federal Attorney General's office in Manhattan.

From Kozinski (via Larry Ribstein):

This case has consumed an inordinate amount of taxpayer resources, and has no doubt devastated the defendant’s personal and professional life. The defendant’s former employer also paid a price, footing a multimillion dollar bill for the defense. And, in the end, the government couldn’t prove that the defendant engaged in any criminal conduct. This is just one of a string of recent cases in which courts have found that federal prosecutors overreached by trying to stretch criminal law beyond its proper bounds...

This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clearly separate conduct that is criminal from conduct that is legal. This is not only because of the dire consequences of a conviction—including disenfranchisement, incarceration and even deportation—but also because criminal law represents the community’s sense of the type of behavior that merits the moral condemnation of society... When prosecutors have to stretch the law or the evidence to secure a conviction, as they did here, it can hardly be said that such moral judgment is warranted.

Is there any doubt that the chill put into independent research and expert networks is arising from prosecutors stretching the law into the gray area?


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