Amicus Curiae Brief — Edward J. Kosinski, Petitioner v. United States

No. 20-1161

In the

Supreme Court of the United States

EDWARD J. KOSINSKI,

Petitioner,

V.

UNITED STATES OF AMERICA,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF OF MARK CUBAN AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

CHRISTOPHER J. CLARK

Counsel of Record

MICHAEL S. BOSWORTH

NICHOLAS R. HAZEN

LATHAM & WATKINS LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

chris.clark@lw.com

Counsel for Amicus Curiae Mark Cuban

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ...................................... ii

INTEREST OF AMICUS CURIAE ............................1

SUMMARY OF ARGUMENT.....................................2

ARGUMENT ...............................................................4

I.

INSIDER TRADING LIABILITY CANNOT

BE IMPOSED ABSENT A RELATIONSHIP

OF TRUST, AS WELL AS CONFIDENCE. .......4

II.

PARTICIPANTS IN THE SECURITIES

MARKETS

NEED

CLEAR

AND

OBJECTIVE EX ANTE RULES ABOUT

WHAT

CONDUCT

CONSTITUTES

INSIDER TRADING. ..........................................7

III. THE RULE OF LENITY COUNSELS

AGAINST PRESERVING THE SECOND

CIRCUIT’S DECISION. ....................................12

CONCLUSION ..........................................................17

ii

TABLE OF AUTHORITIES

Page(s)

Blue Chip Stamps v. Manor Drug

Stores,

421 U.S. 723 (1975) ..............................................12

Central Bank of Denver, N.A. v. First

Interstate Bank of Denver, N.A.,

511 U.S. 164 (1994) ............................................8, 9

Chiarella v. United States,

445 U.S. 222 (1980) .............................. 4, 5, 6, 7, 16

Cleveland v. United States,

531 U.S. 12 (2000) ................................................13

Crandon v. United States,

494 U.S. 152 (1990) ..............................................13

Dirks v. SEC,

463 U.S. 646 (1983) ...................................... passim

McDonnell v. United States,

136 S. Ct. 2355 (2016)..........................................15

Pinter v. Dahl,

486 U.S. 622 (1988) ..........................................8, 12

Salman v. United States,

137 S. Ct. 420 (2016)..........................................5, 6

SEC v. Cuban,

634 F. Supp. 2d 713 (N.D. Tex. 2009) ...................9

SEC v. Cuban,

620 F.3d 551 (5th Cir. 2010)................................10

iii

TABLE OF AUTHORITIES—Continued

Page(s)

SEC v. Tambone,

597 F.3d 436 (1st Cir. 2010) ..................................9

United States v. Bass,

404 U.S. 336 (1971) ........................................14, 16

United States v. Chestman,

947 F.2d 551 (2d Cir. 1991),

cert. denied, 503 U.S. 1004 (1992) .......................11

United States v. Falcone,

257 F.3d 226 (2d Cir. 2001) .................................10

United States v. Lanier,

520 U.S. 259 (1997) ..............................................14

United States v. O’Hagan,

521 U.S. 642 (1997) ......................................5, 6, 15

United States v. Santos,

553 U.S. 507 (2008) ........................................13, 14

United States v. Skilling,

561 U.S. 358 (2010) ..............................................14

United States v. Universal C.I.T. Credit

Corp.,

344 U.S. 218 (1952) ..............................................16

Whitman v. United States,

135 S. Ct. 352 (2014)......................................13, 14

iv

TABLE OF AUTHORITIES—Continued

Page(s)

STATUTES AND REGULATIONS

15 U.S.C. § 78j(b).....................................................2, 4

17 C.F.R. § 240.10b-5 ..............................................2, 4

1

INTEREST OF AMICUS CURIAE1

Mark Cuban is a nationally renowned

entrepreneur and investor. He is the owner of

numerous successful businesses, including the NBA’s

Dallas Mavericks. He is one of the stars of the

television show “Shark Tank.” And for years, he was

the subject of an overly aggressive investigation and

enforcement action brought by the Securities and

Exchange Commission (SEC) based on a completely

novel theory of insider trading liability.

A jury ultimately exonerated Mr. Cuban on all

charges, but he knows firsthand how unfair and

damaging it is to be accused of insider trading on the

basis of new, unclear, and previously unannounced

rules. He had the financial wherewithal to reject the

government’s demand for settlement and to vindicate

his good name, no matter the cost. Not everyone the

SEC pursues is so fortunate.

Mr. Cuban has an abiding interest in ensuring

that the SEC refrains from pursuing individuals

predicated on theories of liability that go beyond this

Court’s jurisprudence and the will of Congress; that

market behavior is governed by clear, predictable,

and reliable ex ante rules; and that the rule of lenity

prevents the imposition of criminal liability where, as

1 Pursuant to Supreme Court Rule 37.6, amicus curiae

states that no counsel for a party authored this brief in whole or

in part, and no such counsel or any party has made a monetary

contribution intended to fund the preparation or submission of

this brief. No person or entity, other than amicus curiae and its

counsel, has made a monetary contribution intended to fund the

preparation and submission of this brief. Counsel of record for

all parties were timely notified more than 10 days prior to filing,

and all parties have consented to the filing of this brief.

2

here, there was not fair warning to a defendant about

the consequences of their conduct.

SUMMARY OF ARGUMENT

For over forty years, this Court has made clear

that Section 10(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17

C.F.R. § 240.10b-5, do not forbid all trading based on

material nonpublic information. Rather, as this

Court has repeatedly held, an individual can only be

held liable for insider trading under these general

anti-fraud provisions where the individual has

breached a fiduciary duty or a similar duty of trust

and confidence. This Court has never suggested, let

alone held, that the mere obligation to keep nonpublic

information confidential, without a corresponding

duty of trust or loyalty, could ever give rise to the

imposition of insider trading liability under Section

10(b).

The Second Circuit’s decision below dramatically

expands the reach of insider trading liability beyond

what Congress or this Court have ever sanctioned.

The decision imposes liability on the basis of a mere

confidentiality agreement and, in so doing,

contravenes the well-settled requirement that an

individual breach a duty of trust, as well as a duty of

confidence, in order to be held liable for insider

trading. The decision, if left unchecked, would bring

within the reach of Section 10(b) a broad array of

commercial relationships that this Court has never

suggested would be subject to insider trading liability.

Consistent with its past efforts to stem the

encroachment of the anti-fraud provisions into

territory not envisioned by Congress, the Court

should intervene to reaffirm that a confidentiality

3

agreement alone cannot suffice to establish insider

trading liability.

The Court should also act to address the

considerable uncertainty that the Second Circuit’s

decision has injected into the securities market. This

Court has previously recognized the need for

certainty and predictability in the securities laws

generally, and the importance of clear guidance in

insider trading law particularly. The law must

provide clear, predictable ex ante rules so that market

participants can determine whether information in

their possession would render trading unlawful and

then act accordingly. The Second Circuit’s decision

below, however, provides no such clear and

predictable guidance. Indeed, it does the opposite. It

transforms a confidentiality agreement into a

fiduciary relationship by considering and applying a

number of inconsistent, fact-intensive tests. The net

effect of the Second Circuit’s post hoc, unclear, grab

bag analysis will be to chill otherwise lawful conduct.

Confidentiality

agreements

are

features

of

innumerable corporate arrangements. Given the

Second Circuit’s imprecise approach, any party to

such an agreement will now have to either forego

lawful trading or bear the increased costs of

participating in the marketplace—including costs

associated with defending against enforcement

actions under novel theories of liability.

Finally, the Second Circuit’s decision must be

overturned because it allows criminal liability to

attach to conduct that has never been clearly

proscribed by statute or this Court’s jurisprudence.

The rule of lenity militates against such a result,

particularly where, as here, the very theory of liability

upon which the petitioner’s conviction is predicated

4

goes beyond the boundaries that Congress and this

Court have drawn. Would-be violators are entitled to

receive fair warning of the consequences of their

criminal conduct. No such warning occurred here.

ARGUMENT

I. INSIDER TRADING LIABILITY CANNOT BE

IMPOSED ABSENT A RELATIONSHIP OF

TRUST, AS WELL AS CONFIDENCE.

For well over a generation, this Court has

recognized that Section 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC

Rule 10b-5, 17 C.F.R. § 240.10b-5, do not create a

“general duty between all participants in market

transactions to forgo actions based on material,

nonpublic information.” Chiarella v. United States,

445 U.S. 222, 233 (1980); see also Dirks v. SEC, 463

U.S. 646, 654 (1983). Rather, these provisions

capture only conduct that is fraudulent or deceptive.

See 15 U.S.C. § 78j(b) (prohibiting the use of “any . . .

deceptive device or contrivance” in connection with

“the purchase or sale of any security” (emphasis

added)); 17 C.F.R. § 240.10b-5 (It is unlawful “(a) [t]o

employ any device, scheme, or artifice to defraud, [or]

. . . (c) [t]o engage in any act, practice, or course of

business which operates or would operate as a fraud

or deceit upon any person, in connection with the

purchase or sale of any security.” (emphasis added));

see also Chiarella, 445 U.S. at 234-35 (“Section 10(b)

is aptly described as a catchall provision, but what it

catches must be fraud.”).

Under this Court’s precedents, undisclosed

trading based on nonpublic market information is

fraudulent or deceptive within the meaning of Section

10(b) only when the trader is under a duty to disclose

5

that information or otherwise abstain from trading.

See Chiarella, 445 U.S. at 235 (“When an allegation

of fraud is based upon nondisclosure, there can be no

fraud absent a duty to speak.”).

Where, as here, a case is pursued under the

“misappropriation theory” of insider trading, liability

exists only where a corporate outsider breaches a

fiduciary duty or similar relationship of “loyalty and

confidentiality.” United States v. O’Hagan, 521 U.S.

642, 652 (1997) (“[T]he misappropriation theory

premises liability on a fiduciary-turned-trader’s

deception of those who entrusted him with access to

confidential information.”). A breach of a mere duty

to keep information confidential is plainly

insufficient—on the contrary, as this Court has

repeatedly indicated, an individual must also have

breached a duty of trust or loyalty in order to be held

liable for insider trading. See id. (“loyalty and

confidentiality”); Dirks, 463 U.S. at 654 (“trust and

confidence”); Chiarella, 445 U.S. at 228, 232 (“trust

and confidence” (citation omitted)); Salman v. United

States, 137 S. Ct. 420, 423 (2016) (“trust and

confidence”). Indeed, the misappropriation theory is

premised upon the notion that a recipient of

nonpublic information commits an act of fraud by

“feigning fidelity to the source of information” and

using that information to his or her own benefit.

O’Hagan, 521 U.S. at 655. Where the recipient of

confidential information has not “feign[ed] fidelity” to

the source by undertaking a duty of trust or loyalty,

trading on such information cannot be deceptive or

fraudulent.

A confidentiality agreement creates an obligation

to maintain the secrecy of information. Sophisticated

parties in arms-length business relationships

6

routinely enter into confidentiality agreements

contemplating no undertaking of trust or loyalty. Of

course, parties to such agreements are free to create

additional contractual restrictions on the use of any

such confidential information. But they are equally

free not to do so. Standing alone, an obligation to keep

information confidential is not sufficient to establish

the duty necessary for insider trading liability under

the conjunctive requirement of trust and confidence.

The law, as articulated by this Court, requires more.

To expand the scope of insider trading liability to

business dealings involving mere non-disclosure

obligations—without any corresponding restrictions

against the use of confidential information—would

impose fiduciary-like duties upon a broad swath of

agreements where no such fiduciary relationship was

contemplated. This would render irrelevant the

“trust” requirement that has been a consistent

element of liability in this Court’s insider trading

decisions. See O’Hagan, 521 U.S. at 652; Dirks, 463

U.S. at 654; Chiarella, 445 U.S. at 228, 232; Salman

v. United States, 137 S. Ct. at 423.

The decision below has effectively done just that.

The Second Circuit has imposed insider trading

liability on the basis of a confidentiality agreement

alone. While the decision purports to divine a

relationship of trust by focusing on other provisions of

the agreement and other facts surrounding the

Petitioner’s relationship with his counterparty, the

inescapable reality is that liability here is predicated

on a fairly standard confidentiality agreement. This

decision expands the reach of Section 10(b) in a way

that is unsupported either by the language of the

Exchange Act or decades of this Court’s

jurisprudence.

It is, in the end, irredeemably

7

“inconsistent with the careful plan that Congress has

enacted for regulation of the securities markets.”

Chiarella, 445 U.S. at 235.

II. PARTICIPANTS IN THE SECURITIES

MARKETS NEED CLEAR AND OBJECTIVE

EX ANTE RULES ABOUT WHAT CONDUCT

CONSTITUTES INSIDER TRADING.

Insider trading law should provide clear,

predictable, ex ante rules that allow traders to

determine with confidence whether any information

in their possession would render trading unlawful. As

demonstrated by the government’s aggressive and

novel theories of liability in both this case and in the

proceedings against amicus curiae, Section 10(b) and

Rule

10b-5

are

susceptible

to

expansive

interpretation and enforcement, inventing liability

where none previously existed and creating

significant uncertainty for market participants going

forward. The Second Circuit here has created new

law establishing insider trading liability on the basis

of a confidentiality agreement, and its unclear,

scattershot, post hoc rationalizations for doing so only

enhance the uncertainty, failing to provide the kind of

clear predictive guidance the market requires. As it

has done in the past, this Court should intervene to

prevent insider trading rules from unduly burdening

the conduct of market participants and the efficient

functioning of the securities market overall.

This Court has recognized that “it is essential . . .

to have a guiding principle for those whose daily

activities must be limited and instructed by the SEC’s

inside-trading rules,” Dirks, 463 U.S. at 664, and has

repeatedly emphasized the need for clear rules in

securities law, “an area that demands certainty and

8

predictability.” Cent. Bank of Denver, N.A. v. First

Interstate Bank of Denver, N.A., 511 U.S. 164, 188

(1994) (quoting Pinter v. Dahl, 486 U.S. 622, 652

(1988)).

The consequence of imprecision in the securities

space is to “prevent[] parties from ordering their

actions in accord with legal requirements.” Dirks, 463

U.S. at 658 n.17.

For law-abiding market

participants, such imprecision has a chilling effect.

To avoid over-deterring legitimate market activities,

securities transactions must be structured around

predictable ex ante rules defining what separates

permissible from impermissible use of undisclosed

corporate information.

Individual traders are not the only parties subject

to the chilling effect of indeterminate insider trading

standards. As this Court has recognized, market

analysts regularly engage in securities pricing

analysis based on material nonpublic information

from corporate insiders. See Dirks, 463 U.S. at 658

(“It is commonplace for analysts to ‘ferret out and

analyze information,’ and this often is done by

meeting with and questioning corporate officers and

others who are insiders.” (citation omitted)). These

sorts of disclosures play a legitimate and pivotal role

in enabling traders to understand the value of a

security and transact accordingly, thereby enhancing

the efficiency of the securities market. See id. at 65859. Resting the legality of trading based on nonpublic

information upon unarticulated, post hoc theories of

liability inhibits market analysts from engaging in

functions that are “necessary to the preservation of a

healthy market,” id. at 658, and “risks over-deterring

activities related to lawful securities sales.” See

Pinter, 486 U.S. at 654 n.29.

9

Expanding the scope of insider trading liability

will also inevitably increase the costs associated with

complying with the securities laws and defending

against inventive enforcement actions. While such

costs may initially be borne by professionals, the

“ripple effects” of “uncertainty and excessive

litigation” will be to pass the increased compliance

and litigation costs onto investors, who are, of course,

“the intended beneficiaries of the statute.” See Cent.

Bank, 511 U.S. at 189; see also SEC v. Tambone, 597

F.3d 436, 452-53 (1st Cir. 2010) (Boudin, J.,

concurring) (“No one sophisticated about markets

believes that multiplying liability is free of cost. And

the cost, initially borne by those who raise capital or

provide audit or other services to companies, gets

passed along to the public.”).

Having spent years fighting against government

enforcement under an expansive theory of insider

trading liability, amicus curiae understands the

unfair and costly effect of insider trading allegations

that are not predicated on clear ex ante rules. The

SEC charged Mr. Cuban with violations of Section

10(b) and Rule 10b-5 under the misappropriation

theory of insider trading, alleging that Mr. Cuban had

received material nonpublic information affecting the

securities of a company in which he was invested after

agreeing to keep the information confidential, and

that he sold his shares in the company after receiving

the confidential information.

The district court granted Mr. Cuban’s motion to

dismiss, concluding that the SEC had failed to allege

that Mr. Cuban’s agreement to keep the information

confidential imposed upon him a duty not to trade on

or otherwise use the information. SEC v. Cuban, 634

F. Supp. 2d 713, 727-28 (N.D. Tex. 2009). The Fifth

10

Circuit reversed the district court’s decision, but only

because it read the SEC’s complaint to allege that Mr.

Cuban had in fact undertaken an agreement not to

trade—not because the confidentiality agreement

alone was sufficient to impose insider trading

liability. See SEC v. Cuban, 620 F.3d 551, 557 (5th

Cir. 2010). Mr. Cuban was subsequently exonerated

on all charges after a jury trial, but only after

incurring significant expense and years of litigation

to vindicate his innocence.

Absent clear and

predictable guidance, other market participants will

be forced to choose between foregoing otherwise

lawful trading or assuming the risks of trading and

the costs that will accompany any subsequent

investigative inquiries.

The Second Circuit’s decision below injects

unpredictability into insider trading law of exactly

the sort that threatens to disrupt the functioning of

the market. This decision fails to articulate any clear

standard from which participants in the securities

markets could derive an understanding of when a

business relationship becomes sufficiently “fiduciarylike” to preclude trading on undisclosed corporate

information. Pet. App. 17a-18a. In finding the

existence of a “fiduciary-like” relationship, the Second

Circuit opined that “[i]t was presumably Regado’s

faith and confidence in Kosinki’s reputation . . . his

experience as a principal investigator, and his

willingness to provide access to his patients, that

caused Regado to secure Kosinski’s services,” thereby

creating a relationship that was “‘marked by’

[Kosinski’s] service of ‘the interests of the party

entrusting him [] with such information.’” Id. (final

alteration in original) (quoting United States v.

Falcone, 257 F.3d 226, 234-35 (2d Cir. 2001)).

11

Crucially, the Second Circuit’s fact-intensive

finding that Kosinski owed fiduciary-like duties to

Regado was not premised upon any “exclusive test of

fiduciary status.” Pet. App. 29a. In fact, the Court

explicitly signaled that such a finding could rest on

factors other than the traditional hallmarks of

fiduciary status (“reliance, and de facto control and

dominance”) as articulated by the Second Circuit in

United States v. Chestman, 947 F.2d 551, 568 (2d Cir.

1991) (citation omitted), cert. denied, 503 U.S. 1004

(1992). Pet. App. 29a-30a (“[W]hile the evidence here

was indeed sufficient to find that Kosinski owed

Regado a fiduciary duty based on reliance, control,

and dominance, that conclusion does not signal that

only such factors can establish a fiduciary duty for

purposes of determining insider-trading liability.”

(emphasis added)). In doing so, the court failed to

heed the Chestman court’s warning to “tread

cautiously in extending the misappropriation theory

to new relationships, lest our efforts to construe Rule

10b-5 lose method and predictability, taking over ‘the

whole corporate universe.’” Chestman, 947 F.2d at

567 (citation omitted).

In light of the Second Circuit’s post hoc, fact-bound

determination that the Petitioner owed “fiduciarylike” duties of trust to Regado, market participants

are left without guidance enabling them to

understand whether any of their arms-length

business relationships involving confidentiality

obligations are “marked by” the service of their

counterparties’ interests such that they may be

exposed to insider trading liability. Pet. App. 18a.

Nor can they predict what other unspecified tests of

fiduciary status may ultimately be applied to render

their conduct unlawful after-the-fact. This decision

12

conflicts with this Court’s long-standing admonition

against legal standards in the securities laws under

which “decisions are made on an ad hoc basis, offering

little predictive value to participants in securities

transactions.” Pinter, 486 U.S. at 652. Such a

“shifting and highly fact-oriented” expansion of

insider trading liability to arms-length business

relationships involving no undertaking of trust or

loyalty fails to provide a “satisfactory basis for a rule

of liability imposed on the conduct of business

transactions.” See Blue Chip Stamps v. Manor Drug

Stores, 421 U.S. 723, 755 (1975).

Amicus curiae does not express an opinion on

whether it was wrongful for the Petitioner to trade in

Regado’s securities after receiving information

affecting the value of the company that was not

available to the public. The critical question is

whether traders and other market participants can

discern a clear rule of liability from the Second

Circuit’s holding that the Petitioner’s conduct

amounted to securities fraud. Because the Second

Circuit failed to provide such a rule, its decision could

have harmful and wide-ranging consequences for the

securities markets, particularly due to the Second

Circuit’s prominence in the area of securities law.

This Court should intervene to ensure that traders,

analysts, and professionals have the benefit of clear

and predictable rules guiding their participation in

the market.

III. THE RULE OF LENITY COUNSELS

AGAINST PRESERVING THE SECOND

CIRCUIT’S DECISION.

The need for clear and predictable ex ante rules

governing insider trading is all the more essential

13

given that defendants such as the Petitioner can be

subjected to criminal liability for any such violations.

As described above, Section 10(b) has been

consistently interpreted by this Court to require a

fiduciary or similar relationship of both trust and

confidence to sustain a conviction for insider trading.

The decision below subjected the Petitioner to

criminal sanctions on the basis of a plain

confidentiality agreement, locating the requisite duty

of trust in a theory of liability that is far removed from

the language of Section 10(b) or this Court’s

jurisprudence.

The Second Circuit upheld the

Petitioner’s conviction for insider trading in the

absence of the kind of clear and fair warning that the

criminal law requires, and well outside the scope of

liability delineated by Congress and this Court. For

these reasons, the Petitioner’s conviction should not

stand.

The language of Section 10(b) does not clearly

prescribe whether a corporate outsider who has

undertaken only a duty of confidentiality may be

liable for insider trading. This ambiguity calls for

application of the rule of lenity, which “requires

ambiguous criminal laws to be interpreted in favor of

the defendants subjected to them.” United States v.

Santos, 553 U.S. 507, 514 (2008); Cleveland v. United

States, 531 U.S. 12, 25 (2000) (“[A]mbiguity

concerning the ambit of criminal statutes should be

resolved in favor of lenity.” (citation omitted)). The

rule of lenity performs two functions. First, it

provides “fair warning” to would-be violators of the

criminal nature of the proscribed conduct. See

Whitman v. United States, 135 S. Ct. 352, 354 (2014)

(citation omitted); Crandon v. United States, 494 U.S.

152, 160 (1990) (“[The] construction of a criminal

14

statute must be guided by the need for fair warning

. . . .”). Second, the rule of lenity precludes courts

from expanding criminal prohibitions beyond what

Congress has proscribed. See Whitman, 135 S. Ct. at

354 (explaining that the rule of lenity “vindicates the

principle that only the legislature may define crimes

and fix punishments.”).

Before criminal penalties may be imposed, a

would-be violator must receive “fair warning” of

“what the law intends to do if a certain line is passed.”

United States v. Bass, 404 U.S. 336, 348 (1971)

(citation omitted); see also United States v. Lanier,

520 U.S. 259, 266 (1997) (explaining that the rule of

lenity “ensures fair warning by so resolving ambiguity

in a criminal statute as to apply it only to conduct

clearly covered.”). To draw the line between lawful

and criminal conduct based on ad-hoc and heavily

fact-bound determinations of liability undermines the

fundamental principle that “no citizen should be held

accountable for violation of a statute whose

commands are uncertain, or subjected to punishment

that is not clearly prescribed.” Santos, 553 U.S. at

514; see also United States v. Skilling, 561 U.S. 358,

416 (2010) (Scalia, J., concurring in part and

concurring in the judgment) (arguing that a criminal

statute imposing liability for breach of fiduciary duty

“provides no ‘ascertainable standard of guilt’”

(citation omitted)).

The law did not provide fair warning to the

Petitioner that his conduct was illegal. The Petitioner

entered into a confidential relationship with an entity

that was not his employer through an agreement that

conspicuously omitted any restrictions on the use of

confidential

information—an

agreement

that

purported to “embod[y] the entire understanding of

15

the parties,” and superseded the parties’ prior

agreement. Pet. App. 21a.

In this case, the Petitioner’s trades did not violate

any clearly defined rules regarding when an

individual can be held liable under the

misappropriation theory of insider trading. Indeed,

Petitioner’s trades did not even constitute a breach of

the very confidentiality agreement the Second Circuit

construed to give rise to criminal liability. The

Second Circuit reasoned its way to upholding

Petitioner’s conviction only through a contrived

analysis of malleable common law standards and

strained ex post factual evaluations. The deployment

of such a “shapeless” approach “to condemn someone

to prison” is contrary to the fundamental due process

right in which the rule of lenity is grounded. See

McDonnell v. United States, 136 S. Ct. 2355, 2373

(2016) (disapproving government’s interpretation of

statute that was “not defined ‘with sufficient

definiteness that ordinary people can understand

what conduct is prohibited,’ or ‘in a manner that does

not encourage arbitrary and discriminatory

enforcement’” (citation omitted)).

It is also far from clear that Congress intended

Section 10(b) to criminalize the sort of conduct for

which the Petitioner was held liable in the first place.

The “classical” and “misappropriation” theories of

insider trading are creatures of jurisprudence, not the

statutory text of Section 10(b). See Dirks, 463 U.S. at

653-55 (describing the jurisprudential history of

insider trading liability under Section 10(b));

O’Hagan, 521 U.S. at 651-653 (describing the

“classical” and “misappropriation” theories developed

by the courts). As this Court has recognized, insider

trading liability is premised upon nondisclosure in

16

connection with the purchase or sale of securities, the

legality of which is not clearly addressed in the

statutory language or legislative history of Section

10(b). See Chiarella, 445 U.S. at 226 (“[Section] 10(b)

does not state whether silence may constitute a

manipulate or deceptive device.”).

When faced with conflicting interpretations of a

statute bearing criminal penalties, “it is appropriate,

before . . . choos[ing] the harsher alternative, to

require that Congress should have spoken in

language that is clear and definite.” United States v.

Universal C.I.T. Credit Corp., 344 U.S. 218, 222

(1952). Because Congress has not clearly addressed

what conduct can subject individuals to criminal

prosecution and incarceration for insider trading, the

rule of lenity cautions against the judicial expansion

of insider trading liability beyond the narrow confines

established under this Court’s limiting precedents.

See Bass, 404 U.S. at 348 (“[B]ecause of the

seriousness of criminal penalties . . . legislatures and

not courts should define criminal activity.”).

The rule of lenity—embodying the fundamental

principle of due process—militates against preserving

the Petitioner’s conviction. This Court’s intervention

is needed to right this wrong and to prevent future

enforcement actions from proceeding untethered to

the clear and established rules of insider trading

liability that have governed this area of the law for

decades.

17

CONCLUSION

For the foregoing reasons, amicus curiae

respectfully urges this Court to grant the petition for

certiorari and reverse the decision of the Second

Circuit.

Respectfully submitted,

CHRISTOPHER J. CLARK

Counsel of Record

MICHAEL S. BOSWORTH

NICHOLAS R. HAZEN

LATHAM & WATKINS LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

chris.clark@lw.com

Counsel for Amicus Curiae Mark Cuban

April 5, 2021