SEC’s Authority to Interpret the Securities Laws Comes Under Fire in Criminal Enforcement

Nov 24, 2014

Reading Time : 3 min

In rejecting Whitman’s argument, the 2nd Circuit cited to an earlier decision that deferred to SEC Rule 10b5-1, a rule that defines what it means to trade “on the basis of” inside information—i.e., when a defendant “uses or employs” such information within the meaning of Section 10(b). Rule 10b5-1 states that it is enough if a defendant was “aware” of inside information when trading, a lower standard than the one Whitman advocated. Under the Supreme Court’s decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), federal courts generally defer to an executive agency’s interpretation of an ambiguous law so long as it is reasonable. On that basis, the 2nd Circuit rejected Whitman’s argument and affirmed the trial court’s jury instruction.

Whitman’s petition for certiorari to the Supreme Court did not challenge this part of the 2nd Circuit’s ruling. Nevertheless, Justice Scalia issued a statement accompanying the denial of certiorari, joined by Justice Clarence Thomas, in which he expressed doubts on whether deference to the SEC is proper when a court interprets a law, such as Section 10(b), that can give rise to criminal liability. Scalia contended that Chevron deference in such circumstances “collide[s] with the norm that legislatures, not executive officers, define crimes,” and allows civil regulators to create “new crimes at will”—a concern that is especially pointed when civil regulators, such as the SEC, have a tradition of close collaboration with criminal prosecutors in law enforcement.

Scalia acknowledged that Congress could make it a crime to violate an SEC rule, but thought it a stretch to “presume” that Congress gave the SEC the “power to resolve ambiguities in criminal legislation,” especially since the SEC’s authority only extends to civil enforcement of the securities laws. It may be argued, perhaps, that this is what Congress intended with Section 10(b), which criminalizes fraud “in contravention of such rules and regulations as the [SEC] may prescribe”—language that arguably empowers the SEC to define the parameters of criminal liability. Under the Supreme Court’s “intelligible principle” doctrine, Congress can delegate legislative power to the executive branch, so long as the bounds of delegation are intelligibly defined. Scalia acknowledged that in the decades since the Supreme Court decided Chevron, federal courts have often deferred to “executive interpretations of a variety of laws that have both criminal and administrative applications.” Indeed, Scalia himself joined a unanimous Supreme Court ruling deferring to the SEC’s interpretation of another part of Section 10(b) (albeit in a civil enforcement context) in SEC v. Zandford, 535 U.S. 813 (2002).

Nevertheless, Scalia invited future cases challenging the deference owed by the courts to SEC interpretations of the securities laws in criminal cases, saying he would be “receptive to granting” a petition that properly presented the question. This all but ensures that Scalia’s arguments will become commonplace in criminal securities prosecutions in the lower courts going forward.

In his statement, Scalia also raised a second challenge to Chevron deference to the SEC in criminal securities cases, arguing that such deference would violate the “rule of lenity”—a canon of construction that requires courts to interpret ambiguous criminal laws in a defendant’s favor. Scalia recognized that the Supreme Court previously rejected the argument that the rule of lenity trumps Chevron deference, but dismissed the earlier decision as a “drive-by ruling.” He further suggested that several other decisions of the high court have independently recognized that if a law can be enforced both criminally and civilly, “the rule of lenity governs its interpretation in both settings.”

If Scalia’s arguments ultimately prevail, this will have far-reaching implications for criminal securities enforcement and for the SEC more generally. Since many of the laws the SEC enforces can give rise to criminal sanctions, the SEC could be denied deference in a wide range of cases, leaving its rules subject to frequent challenge. Scalia’s statement could also invite litigants to argue that the rule of lenity compels courts to interpret various provisions of the securities laws against the SEC even in civil enforcement cases, an argument that historically had little currency against the agency.

Justice Scalia’s statement has no precedential weight, but it indicates that two of the justices of the Supreme Court are amenable to reconsidering the deference owed to the SEC’s interpretation of the federal securities laws in criminal and perhaps also civil cases. At a minimum, their views will likely lead to an uptick in litigation in the lower courts in cases alleging violations of the securities laws.

Share This Insight

Previous Entries

Akin Deal Diary

April 12, 2023

Read More

Akin Deal Diary

2022-12-15

On December 14, 2022, the Securities and Exchange Commission (SEC) adopted amendments regarding Rule 10b5-1 insider trading plans and related disclosures. The amendments aim to strengthen investor protections concerning insider trading and to help shareholders understand when and how insiders are trading in securities for which they may at times have material nonpublic information (MNPI). In light of these amendments, issuers should review and revise, if needed, their insider trading policies and equity grant policies.

Read more.

...

Read More

© 2024 Akin Gump Strauss Hauer & Feld LLP. All rights reserved. Attorney advertising. This document is distributed for informational use only; it does not constitute legal advice and should not be used as such. Prior results do not guarantee a similar outcome. Akin is the practicing name of Akin Gump LLP, a New York limited liability partnership authorized and regulated by the Solicitors Regulation Authority under number 267321. A list of the partners is available for inspection at Eighth Floor, Ten Bishops Square, London E1 6EG. For more information about Akin Gump LLP, Akin Gump Strauss Hauer & Feld LLP and other associated entities under which the Akin Gump network operates worldwide, please see our Legal Notices page.