abstract. This Note advances a general theory of insider trading liability under the fraud prohibitions of the U.S. Criminal Code. For half a century, federal prosecutors have pursued insider trading convictions by charging defendants with willfully violating the securities laws. But the resulting doctrine has long been viewed as incoherent, inefficient, unpredictable, and unjust.

I articulate and defend a Title 18 insider trading framework independent of the classic tests of Rule 10b-5. Doctrinally, I translate the traditional axes of insider trading liability into the lexicon of federal criminal law. And as a normative matter, I argue that the well-established elements of federal criminal fraud better anchor insider trading’s legal forms to its conceptual foundations. Once detached from the law of Rule 10b-5, a standalone Title 18 model charts a viable path out of insider trading’s doctrinal quagmire—crucially, without requiring further legislative reform. It also rationalizes the Second Circuit’s recent landmark holding in United States v. Blaszczak, which securities scholars have largely regarded as an aberration. That case has returned to the Second Circuit after grant, vacatur, and remand by the Supreme Court, and a new decision is still pending as of the time this Note is being finalized for print.

In the short run, the Title 18 approach recasts the offense as embezzlement from a nonconsenting information owner, and it streamlines proof of the elements in criminal insider trading prosecutions. But in the long run, Title 18 can meaningfully insulate insider trading doctrine from the specter of prosecutorial and judicial overreach.

author. J.D. 2021, Yale Law School; A.B. 2016 in Statistics, Harvard University. Special thanks to Kate Stith for her invaluable support and guidance. I am also indebted to Ian Ayres, Amy Chua, Abbe Gluck, Emily Hall, Christine Magdo, John Morley, Steffi Ostrowski, Nicholas Parrillo, Claire Priest, Ketan Ramakrishnan, Roberta Romano, Simone Seiver, Derek Weiss, Gideon Yaffe, and David Zornow for their insightful comments, and to students in the Spring 2020 Advanced Criminal Law Research Seminar and participants in the Yale Law Journal Student Scholarship Workshop for their helpful suggestions. Finally, I am grateful to Jordan Dannenberg and the rest of the Journal’s editors for their excellent revisions. A previous version of this Note was awarded Yale Law School’s Colby Townsend Memorial Prize for the best paper by a second-year student and the Judge Ralph K. Winter, Jr. Prize for the best paper in corporate law.

Introduction

Securities and Exchange Commission (SEC) Rule 10b-5 prohibits the use of any “device, scheme or artifice to defraud . . . in connection with the purchase or sale of any security.”1 In the 1960s, the SEC began to allege that under certain circumstances, corporate insiders break the Rule by trading while in possession of material nonpublic information (MNPI).2 Federal prosecutors followed suit, initiating criminal prosecutions by charging defendants with “willfully” violating Rule 10b-5.3 Over time, the courts have grown a “judicial oak” to “flesh out” 10b-5 doctrine,4 and with it, the ever-evolving ban on insider trading.

Few are content with the regime this paradigm has produced. The law of insider trading is “arbitrary,”5 “dysfunctional,”6 “ad hoc,”7 and “maddening.”8 The field “suffer[s] from uncertainty and ambiguity to a degree not seen in other areas of law.”9 Landmark holdings quickly become the object of precedential ping-pong between the Second Circuit and the Supreme Court.10 Statutory codification of judge-made rules is perennially proposed, but never enacted.11 SEC regulations offer some clarity on the margins, but they explicitly avoid disturbing “[t]he law of insider trading [as] otherwise defined by judicial opinions.”12 And as litigation rages on, the ban on insider trading continues to engender serious, even fundamental doubts: whether it is good policy, whether its elements capture core instances of the offense, whether its common-law evolution comports with due process and the separation of powers, and whether it was ever duly enacted into federal law in the first place.13

Through it all, courts and commentators have situated the principal legal grounds for the offense within the domain of securities regulation. Because prosecutors mirrored the SEC and pursued the agency’s theory of insider trading liability, the law’s mode of analysis, its enforcement apparatus, and its substantive commands all arose in tandem with broader securities jurisprudence. Criminal insider trading, by construction, must track the elements and interpretive method of Rule 10b-5. The crime is, by historical accident, a creature of the securities laws.

This Note proposes that the path out of the quagmire is to abandon the securities-regulation model altogether. The law of insider trading, at a basic level, has little to do with the byzantine regulatory and statutory scheme governing public offerings, periodic disclosure, and private distributions.14 It is far removed even from the rest of Rule 10b-5 litigation,15 so much so that the major securities-regulation casebooks treat the topics “Rule 10b-5 Securities Fraud” and “Insider Trading” as distinct subjects warranting separate chapters.16 Indeed, while the paradigmatic example involves an insider trading his corporation’s securities, there is no obvious reason to categorically exempt the trading of commodity futures, spot currencies, precious metals, or any other assets outside the purview of the securities laws.

Rule 10b-5 doctrine, both in substance and in form, has masked and distorted the simple conceptual basis for insider trading law: the crime of embezzlement.17 And embezzlement—the fraudulent appropriation of property entrusted to one’s care—is already prohibited elsewhere under federal law. Title 18, the U.S. Criminal Code, imposes its own sweeping prohibitions on “scheme[s] . . . to defraud.”18 Since well before the promulgation of Rule 10b-5, the Court has held that embezzlement is per se an act of fraud.19 The object of embezzlement may be tangible or intangible property, including nonpublic information.20 When an entrusted corporate insider appropriates confidential business information to her own use, then, she has executed a scheme to defraud. If she also triggers a statutory jurisdictional hook—often by using the mails21 or wires22—she has committed a federal crime.

The Title 18 approach has long stood in Rule 10b-5’s shadow. Prosecutors have often successfully supplemented criminal 10b-5 counts with embezzlement-as-fraud charges,23 but the prevailing, securities-centric narrative has been that Title 18 insider trading liability for securities transactions is practically subsumed by Rule 10b-5.24 On this account, Title 18 has little or no independent force, securities doctrine provides the dominant mode of analysis, and insider trading in securities markets is generally not prosecutable absent a violation of Rule 10b-5. This view has persisted even as Congress, through the Sarbanes-Oxley Act of 2002 (SOX), has added to Title 18 a ban on securities fraud, which mirrors the classic mail- and wire-fraud statutes.25 Supposing that the statute merely duplicated 10b-5 “securities fraud,” some scholars noted in passing that they could not “think of any reason for the use of this unnecessary Sarbanes-Oxley Act provision.”26

The Second Circuit shattered this consensus in December 2019 with its ruling in United States v. Blaszczak.27 Defendants, convicted of insider trading under the Title 18 fraud statutes, argued that a crucial 10b-5 instruction—that the insider must have received a “personal benefit”—had been impermissibly omitted from the jury charge.28 The panel, however, disagreed.29 It held that Title 18 fraud, unlike its traditional counterpart in the securities laws, has no personal-benefit requirement at all.30 Insider trading under Title 18, per the court’s logic, is not a mere parallel vehicle of criminal liability to the conventional one under the securities laws: it is a different offense altogether, with its own elements and its own distinct legal standards.31

After Blaszczak, several securities scholars decried a “siege” on settled law,32 and the list of law-firm blogs raising concern over the case’s implications reads as a “who’s who” of the New York white-collar bar.33 But consistent with the Second Circuit’s personal-benefit holding in Blaszczak,this Note advances a model of Title 18 insider trading independent of the law of Rule 10b-5. I argue that a standalone theory of Title 18 insider trading is not only plausible—it helps explain where insider trading doctrine went astray, and how courts can realign it with its legal and conceptual foundations.

This Note has two central objectives. The first is to sketch a doctrinal framework for Title 18 insider trading liability. I show that each of the judge-made rules of 10b-5 case law is remarkably close to—but meaningfully different from—a well-established doctrinal concept in federal criminal law.34 By operating in the Title 18 paradigm and casting insider trading as simple embezzlement (within federal jurisdiction)from a nonconsenting information owner, courts can cut some of the Gordian doctrinal knots, rooted in the path-dependent evolution of the securities laws, that have long plagued insider trading law. Under the Title 18 model, insider trading is no more connected to securities regulation than wire fraud is to telecommunications law. Predicate fields are relevant only for delimiting the scope of federal jurisdiction: Did a defendant transmit an interstate wire communication?35 Did the scheme have a connection with a security?36 The remaining elements of Title 18 fraud—roughly uniform across its several sections—set the substantive contours of the offense and define, with surprising clarity, the bounds of criminally proscribed insider trading.

The second task is to demonstrate that a shift to Title 18 is worth welcoming. It is no coincidence, I argue, that each of the Title 18 parallels to Rule 10b-5 is more coherent and deeply rooted in longstanding legal norms. Time and again, the courts’ securities precedents have shown that when judges openly decide outcomes on policy grounds, hard cases make bad law.37 More egregiously, in the realm of insider trading, judicial inventions have served as the basis for criminalconvictions. The use of amorphous, extralegal criminal standards to imprison defendants should unite in opposition civil libertarians, criminal-defendant advocates, and interpretive textualists.38 Title 18 restrains this criminal-law adventurism by tethering the offense to common-law fraud while avoiding the common-law creation of crimes. But because Title 18 marginally expands the elements of liability relative to Rule 10b-5, it clarifies the law without sacrificing the force of criminal sanctions. Prosecutors should be among its strongest advocates.

Insider trading doctrine is at sea, but it can and should be anchored to the law of fraud as federal crime. Part I critiques insider trading case law under Rule 10b-5. Part II outlines the “embezzlement within federal jurisdiction” theory under Title 18 and makes the case for its conceptual integrity. Part III traces doctrinal improvements to differences in interpretive method, and it suggests that Title 18 offers defendants better long-run protection from prosecutorial and judicial excess. Part IV responds to possible objections. The first two Parts, though far from claiming to provide definitive or comprehensive answers, work toward tentative doctrinal conclusions. The last two Parts step back to evaluate why the securities-regulation model has failed us; why Title 18 dominates; and why federal-criminal principles can make insider trading doctrine more law-like, more just, and less maddening.