TOP STORY—E.D. Pa.: Dirks personal benefit test not a required element for criminal insider trading - 11 October 2021

The court declined to import the Dirks personal benefit test from Exchange Act cases into insider trading cases brought under Title 18.

A district court rejected a proposed jury instruction that the "personal benefit test" applies to securities fraud charged under Title 18. The defendant in this case was charged with securities fraud for participating in an insider trading scheme. The government maintained that it does not have to prove that a tipper received any "personal benefit" from an alleged tip, while the defendant argued that the requirement, which exists in cases brought under the Exchange Act, should also apply to Title 18. The court concluded that there were no convincing legal or policy reasons to import the personal benefits test into Title 18 (U.S. v. Ramsey, October 4, 2021, Pratter, G.).

Insider trading. In May 2019, defendant Mark Wayne Ramsey was charged with securities fraud for participating in an insider trading scheme perpetrated by a professional football player and former investment banker. Ramsey was the friend and roommate of NFL football player Mychal Kendricks (then with the Philadelphia Eagles). An investment banker, Damilare Sonoiki, began tipping Kendricks about upcoming corporate mergers that Sonoiki's investment bank was retained to advise, and Kendricks traded based upon this information.

The indictment against Ramsey alleged that Kendricks gave Ramsey access to his brokerage account. Relying on the material, non-public information they received from Sonoiki, Kendricks and Ramsey purchased call options between July 2014 and November 2014 in the target companies, profiting when the mergers were announced and the value of the options rose. During the period of the conspiracy, Kendricks allegedly provided, among other things, $15,000 to Ramsey for his participation in the scheme. On September 29, 2021, after a six-day trial, Ramsey was found guilty on six out of ten counts of securities fraud and conspiracy to commit securities fraud.

Personal benefit needed? At issue was a charge under Section 1348(1) of Title 18. Under that section the government must prove beyond a reasonable doubt: knowing participation in a scheme to defraud; fraudulent intent; and that the scheme to defraud was in connection with a security of a certain issuer. The parties disagreed over the definition of "scheme to defraud." Specifically, the parties disputed whether a charge of securities fraud under Title 18 based on the misappropriation theory of insider trading requires proof that the tipper received a "personal benefit" from the tip. Ramsey argued that the same personal benefit test required under the Exchange Act applies under Title 18.

The personal benefit test does not apply. The court was not persuaded by Ramsey's argument for both legal and policy reasons. Addressing the legal reason first, the court noted that only one court has engaged in any substantive analysis of this issue. In U.S. v. Blaszczak, the Second Circuit took a close look at Titles 15 and 18 and concluded that the personal benefit test does not apply to Title 18. In reaching this conclusion, the panel read Dirks v. SEC (U.S. 1983) as establishing the personal benefit test based on the statutory purpose of the Exchange Act and to enforce Congress's intent to eliminate the use of inside information for personal advantage. This statutory context does not exist for Title 18, which is based on an embezzlement theory of fraud and where there is no requirement that an insider has breached a duty to the property owner. In addition, the panel said the Section 1348 provides a different and more broad enforcement mechanism than that found in Title 15. For these reasons, the Second Circuit declined to extend the personal benefit test to Title 18.

Ramsey argued that the Second Circuit's reasoning and conclusion were "bunk," as the opinion puts it, because Blaszczak was vacated and remanded by the Supreme Court in January 2021. The order granting certiorari, vacating, and remanding ("GVR"), however, did not mention the personal benefit test, and it cannot be inferred from the remand whether or not the Court was interested in the question, the court said. Vacated or not, the court said that the reasoning in Blaszczak remains persuasive. Too, as a matter of law, a GVR is not precedential. The court accordingly found that Ramsey failed to offer any convincing reason to import the personal benefit test into Title 18.

No policy reason. The court then found that as a matter of policy, concluding that the personal benefit test does not apply to offenses under Title 18 makes logical sense. The court noted that numerous courts have discussed the broad language of Section 1348 and the policy choices behind it. The purpose of the section and policy behind it supports the argument that Congress intended to make proof of an offense of securities fraud less demanding under Title 18 than it is under Title 15.

The case is No. 2:19-cr-00268.

Attorneys: Alexandra M. Lastowski, U.S. Attorney's Office, for the United States. Ann Campbell Flannery (Law Offices of Ann C. Flannery, LLC) and Rocco C. Cipparone, Jr. (Rocco C. Cipparone, Jr. Law Offices) for Mark Wayne Ramsey a/k/a Christian Ramsey.

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