Reed Pushes to Prohibit Insider Trading & Crack Down on Securities Fraud

WASHINGTON, DC – In an effort to effectively counter insider trading, U.S. Senator Jack Reed (D-RI), a member of the Senate Banking Committee, introduced the Insider Trading Prohibition Act ( S.5320 ) to establish a clear statutory prohibition against insider trading. This legislation seeks to clearly define the offense of insider trading under federal law and remove some of the uncertainty that has curtailed securities regulators’ and law enforcement’s ability to effectively pursue and prosecute insider trading cases. If passed, Reed’s legislation would make it even more obvious that President Trump’s scheme to sell a $100,000 monthly subscription service to provide earlier access to the President’s Truth Social posts is, by definition, ‘Insider Trading.’ And not only is it unethical for President Trump to try to further monetize the presidency to enrich his family, but this scheme is unlawful. “Insider trading puts the average investor at a disadvantage and reduces both public trust and confidence in our markets. Cracking down on unlawful insider trading should be a bipartisan priority,” said Senator Reed. “This legislation provides a clear definition of insider trading, with appropriate safety valves, that will help protect the investing public. Sharpening the definition of insider trading will clear up ambiguity in the law and help repair a broken system.” When corporate insiders and others who wrongfully obtain inside information trade on it, they essentially engage in theft. But currently – and to the shock of many Americans -- there is no federal statute on the books specifically banning insider trading. Rather, the unlawfulness of insider trading is predicated on the notion that insider trading is a type of securities fraud under the Securities Exchange Act of 1934 and subject to broad judicial interpretation. With courts left to define much of the law on a case-by-case basis, the result has been an unnecessarily complex, inconsistent, and uncertain legal standard. According to the Securities and Exchange Commission (SEC), illegal insider trading, as currently defined by the courts, refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. The Insider Trading Prohibition Act aims to distill the offense of insider trading to clear, bright line rules: if a person trades a security on the basis of information that the person is aware is material and nonpublic and is aware was wrongfully obtained, then that person has engaged in unlawful insider trading. The legislation is cosponsored by U.S. Senators Chris Van Hollen (D-MD), Andy Kim (D-NJ), Angela Alsobrooks (D-MD), and Lisa Blunt Rochester (D-DE). To illustrate the problem of trying insider trading cases, Reed pointed to the words of U.S. District Court Judge Jed S. Rakoff, who has presided over many insider trading cases before the Southern District of New York. Judge Rakoff wrote in a recent opinion that “the crime of insider trading is a straightforward concept that some courts have somehow managed to complicate.” In the absence of a statutory definition, an inconsistent and complicated body of common law – an accumulation of cases and judicial precedents – has developed as the courts have used varying interpretations of anti-fraud statutes in order to decide insider trading cases. The Insider Trading Prohibition Act: • Makes it unlawful for a person to trade while aware of material, non-public information if that person knows, or has reason to know that the information was obtained wrongfully, for example, through theft, bribery, hacking, misappropriation, or a breach of a fiduciary duty for a personal benefit. • Prohibits those with material, nonpublic information from wrongfully passing along that information to others, or tipping them, if the person is aware that the communication would result in trading and the recipient does in fact trade based on that communication.