Washington Law Review


Oriana N. Li


The U.S. Supreme Court has yet to address an underlying issue in the evolution of insider trading law: whether Rule 10b-5 liability should attach when someone trades while "in the possession of" material, nonpublic information, or whether a more stringent standard of having actually used or traded "on the basis of" such information must be met. In United States v. Smith, the Court of Appeals for the Ninth Circuit held that a violation of Rule 10b-5 requires an actual causal connection between the possession of inside information and the decision to trade in securities. This Note argues that the court erred in dismissing the knowing possession standard in favor of adopting an actual use standard. Although a causal connection between inside information and trading is an element of the Rule 10b-5 offense, this Note argues that knowing possession alone sufficiently satisfies the scienter and "to use and employ" elements of § 10(b) to establish the causal connection. The knowing possession standard finds support in the statutory interpretation of § 10(b), analogous anti-fraud provisions, judicial and administrative precedent, and the policy objective of achieving an honest securities market through full disclosure of material nonpublic information.

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