US v. Newman and the Rewriting of the Law of Insider Trading (Part 16)

How will this case come out? 

First, the court has to decide whether to take the case en banc.  Second, assuming it does, the court has to decide whether to revise the analysis of the Newman panel. 

With respect to the decision on rehearing en banc, the case warrants rehearing.  Predicting the outcome of these things is inherently uncertain.  Nonetheless, the case involves important legal issues that arguably (clearly?) conflict with a Supreme Court decision that will have a significant effect on the ability to trade on material inside information.  On that basis, the court should rehear the case en banc.

If the issue is considered in political terms, the court should also grant rehearing.  The panel in Newman consisted of three judges appointed by Republican presidents.  The panel included judges Winter (appointed by President Reagan), Parker (appointed by the second President Bush), and Hall (appointed by the second President Bush).  The list of judges in the Second Circuit and their date of appointment is here.   

The full Second Circuit that will consider the petition for rehearing en banc currently has a majority of judges appointed by Democratic presidents.  There are 13 active judges.  Eight were appointed by Democratic presidents (5 by President Obama; 3 by President Clinton) and five by Republican presidents (1 by President Bush Sr. and four by the second President Bush).  This change is relatively recent; in 2008, for example, the court was divided equally between appointees of Republican and Democratic presidents (with one vacancy).  

The rules of the Second Circuit provide that only active judges can vote on whether to hear a matter en banc where democratic appointees have a decisive advantage.  See IOP Rule 35.1(b) ("Only an active judge may vote to determine whether a case should be heard or reheard en banc.").  On that issue, therefore, the appointees of Democratic presidents have an 8-5 advantage.  Moreover, two of the judges on the Newman panel, Judges Winter and Parker, cannot participate in the poll since both have taken senior status.  A vote that breaks along party lines will, therefore, result in the court agreeing to rehear the case en banc. 

In political terms, the decision on the merits is much closer.  The rules of the Second Circuit provide that decisions en banc are to be made by active judges.  In addition, however, the rules allow the senior judges on the relevant panel to participate.  See IOP 35.1(d) ("Only an active judge or a senior judge who either sat on the three-judge panel or took senior status after a case was heard or reheard en banc may participate in the en banc decision.").  

Judges Winter and Parker, having taken senior status, cannot, therefore, participate in the decision to rehear en banc but can participate in the actual decision by the full court.  If they do, the political balance in the decision making phase shifts from 8-5 in favor of appointees of Democratic presidents to 8-7, still an advantage but a much closer one.  This does not, of course, take into account other factors that may change the make-up of the full court such as recusals. 

Of course, what would be best would be a decision that does not break along party lines but instead results in a clear and unequivocal reversal of the analysis in Newman.  

With respect to Newman, the decision and the request for rehearing en banc is posted, along with the SEC’s amicus brief, at the DU Corporate Governance web site.  The amicus filed by a small group of law professors that supports the decision is here. 

J Robert Brown Jr.