A Missed Opportunity To Define Insider Trading: United States v. Heron
Originally published in PLI Securities law handbook (2009)
With SHIRLI FABBRI WEISS
Just about everyone opposes illegal insider trading ("insider trading") in principle, but insider trading can be difficult to define in practice. Whether information is "material" is difficult to assess in the abstract and frequently difficult to discern at the time of trading, as materiality is a fact-based inquiry based on the perspective of the objective "reasonable investor." Notably, it is not per se unlawful for someone to trade while in possession of material nonpublic information; among other things, the information must have been misappropriated in breach of a fiduciary duty on the part of someone in the chain of custody, be it the trader himself (if he is an insider) or the source of the information (a tipper). Furthermore, it is unclear whether it is enough that the trader was "in possession" of material nonpublic information, or rather whether it must also be shown that that the trader used the information in his trades. If use is required, it is difficult to ascertain when material nonpublic information was used in making a trade. When the Securities and Exchange Commission attempted to resolve the possession vs. use debate by promulgating Rules 10b5-1(a) and (b) in December 2000, it did so by deeming that liability exists when a person trades "on the basis of" material nonpublic information (Rule 10b5-1(a)), and that a person presumptively trades "on the basis of" material nonpublic information when he purchases or sells securities merely while aware of that information (Rule 10b5-1(b)). However, the validity of the rules has not been established conclusively, and hence the need to determine when information was in fact used in a defendant's trades has not been eliminated.
In December 2007, a district court judge issued an opinion that advanced the effort to define insider trading. In United States v. Heron, 525 F. Supp. 2d 729 (E.D. Pa. 2007), Judge Stewart Dalzell reversed most of a criminal conviction following a jury trial, and in the alternative granted a motion for a new trial, in an insider trading prosecution against the former General Counsel of a semiconductor assembly company. In April of this year, however, the Third Circuit reversed Judge Dalzell's judgment, in an opinion the Court chose not to declare predecential. Meanwhile, in March 2008 and February 2009, the Tenth Circuit issued two opinions in another notorious insider trading prosecution, United States v. Nacchio. Most of the first Tenth Circuit opinion (issued by a three judgment panel), and all of the second opinion (issued after reconsideration en banc), concerns the admissibility of expert opinion on the topic of materiality. Of interest in this article, however, is a brief analysis of the duty to disclose or abstain from trading, which intersects with materiality issues considered by the district court in Heron.
This article examines how the district court's opinion in Heron applied remarkably practical and sensible solutions to the difficult issues of insider trading. (The opinion also was courageous, as it reversed a verdict of guilty in a controversial case, which was prosecuted using what the court characterized as inflammatory language, and reached after only three hours of jury deliberation.) The Third Circuit's reversal of the district court in Heron thus represents a missed opportunity to define insider trading-although, as will be seen, the appellate court did not reject or in fact address some of the insights advanced by the district court on the issue of materiality. Nacchio illustrates the effect of the failure to recognize those very insights: potential liability for all trades made by corporate insiders, an outcome Congress never intended in enacting the securities laws.
According to the relevant opinions, the defendant in Heron was the General Counsel and Chief Compliance Officer of a public company, accused of insider trading in violation of the insider trading policy he himself was tasked to enforce for his employer.
The government charged him with four separate incidents of illegal trading. The first count, for conspiracy to commit securities fraud, was based on an alleged agreement between the defendant and a colleague at another company to share material nonpublic information about their respective companies on which each could trade; i.e., to engage in reciprocal tipping. The count was based on twenty e-mails exchanged between the two men.
The remaining three counts, for securities fraud, focused on the defendant's trades in the securities of his own company. The first of these theories, and the second count on which the government proceeded, was that the defendant traded after learning that the company would likely release positive quarterly earnings. A portion of the allegedly undisclosed material nonpublic nature of this information stemmed from an undisclosed SEC request for information about the effect of a restatement at a Korean affiliate of the defendant's company on the company's financials. The defendant learned that the company's auditors predicted that the problem would not materially impact the financial statements. The defendant knew this, and at some point learned that the SEC had informed the company that no restatement was required. The government charged that when the defendant knew that his company would release positive quarterly earnings, untainted by the need for a restatement, he purchased 4,000 shares of common stock, and then purchased additional shares and sold calls.
The third count challenged trades made between one and three days after the defendant received a draft press release revealing adverse quarterly earnings. The defendant, who was involved in editing the press release, then sold 3,000 shares of common stock, purchased 70 puts, and sold 30 calls. The morning after the final transaction, the company issued a press release largely identical to the draft the defendant had seen and edited, and the company's stock plummeted more than 31%.
The fourth and final count was that the defendant traded from May 24 through July 23, 2004, when he knew that company had started out the next quarter with poor performance, and that the company was pursuing an acquisition that market would not favor. Among other things, the government contended, the results for the first month of the quarter were poor, and there was discussion within management ranks of whether to pre-announce a miss to the forecasts. At the time senior management became concerned about the possibility of poor quarterly earnings, and in the final stages of the acquisition, the defendant sold 17,000 shares of company stock, sold 70 calls, and purchased 200 puts.
The District Court Overturns Most Of The Conviction
After a five day trial and less than three hours of deliberation, a jury convicted the defendant on all counts. The defendant moved for a verdict of acquittal under Federal Rule of Criminal Procedure 29, and in the alternative for a new trial under Federal Rule of Criminal Procedure 33.
In addressing the acquittal motion, the district court considered the sufficiency of the evidence for each of the four counts. The court's rulings on two of the counts were relatively routine. It affirmed the conviction on the third count, which as noted above alleged that the defendant had traded at time when he was editing an adverse earnings release. The court reasoned that was not irrational for the jury to discredit the defendant's assertion that he sold stock in order to diversify his portfolio, and find instead that the impending press release had motivated his trades-especially given the small time window in which the trades had been made and the defendant's sudden increase in options trading.
The district court reversed the conviction based on the reciprocal tipping count for lack of evidence. According to the court, the e-mails between the defendant and his alleged co-conspirator disclosed no trades or intent to trade. Moreover, no reasonable jury could find that the alleged co-conspirator, a part-time salesman principally involved with the South American operations of his company, was an insider of that company. Furthermore, the evidence did not show that the defendant had communicated adverse information about his company to the co-conspirator, or before the latter's two sales of stock in the defendant's company. Hence, there was no agreement to exchange material nonpublic information, no conspiracy, no tipping, and no crime.
The district court also reversed the convictions based on the other two counts, which were that the defendant had purchased stock when he knew that the company would announce favorable quarterly results, untainted by a restatement; and that the defendant later sold stock when early results for the quarter were poor and when the company was pursuing an acquisition that would be regarded unfavorably. In reaching these rulings, the court enunciated several important propositions with regard to three elements of liability, as explained below.
In the alternative, the district court partially granted a motion for a new trial under Federal Rule of Criminal Procedure 52(b). The defendant's Rule 33 motion was untimely, and hence could not be granted. However, the court ruled sua sponte that a new trial under Rule 52(b) was appropriate based upon "a number of aspects of the conduct of the case that were deeply troubling." According to the court, in "[a]n appalling seventeen times in a little over an hour," the AUSA misstated the standard for materiality as what an investor would "want to know." This "chant" was a deliberate attempt to mislead the jury, and was compounded by other attempts to invite the jury "to find that a crime had been committed any time [the defendant] made money trading [the company's] stock," such as calling him "a common thief" and his expert as a "hack." This misconduct resulted in clear prejudice, and justified a new trial for the three count on which the jury had found against the defendant and the district court had reversed. The misconduct was harmless as to the third count, for which there was a clear violation, and hence a new trial was denied as to that count.
The most interesting portions of the district court's opinion concern the element of materiality. Here, the court adopted a practical and common sense approach, which counseled against drawing too easy conclusions that internal corporation information is material, given that corporate insiders almost always have information that the general public does not.
For example, in discussing the fourth count, the court held that it could not be the case that the initial monthly financial results were material nonpublic information per se, as this would prohibit insiders from ever selling stock. Likewise, in considering whether the defendant's knowledge that the company was involved in a business venture was material, the court acknowledged the "unavoidable reality" that "corporate insiders will always have greater access to information that outside investors." Hence, the court declined to hold that all insider information is material. If the law were otherwise, an executive could "never safely trade in [company] securities because he would always have material, non-public information." Such a result would be "undesirable" and an "improper reading of the law."
Following up on this insight, the district court recognized that information that merely maintains the status quo is not material. The court enunciated this proposition in discussing the allegation that the defendant traded with knowledge that the SEC would not require a restatement. The court held that this information was immaterial as a matter of law. The company had not disclosed the SEC investigation, and hence investors were not aware that a restatement was possible. The court continued: "If anything, the SEC's determination would merely have returned the situation to the status quo ante."
The district court also enunciated an objective standard of materiality, but one in which subjective factors could negate the element. This perspective was reflected in the analysis of three set of circumstances. First, the government could not use the fact that the defendant had traded during closed windows in violation of the insider trading policy to prove materiality. For one thing, it is not per se criminal to violate an internal policy-even one that appears at first glance to be designed to insure compliance with the law. Moreover, the court recognized, an insider trading policy may be designed to restrict conduct beyond what is required by the securities laws, by prohibiting trades even when there is not information within the company that is genuinely material and nonpublic. As the compliance officer, the defendant could have closed the trading windows to protect the company against even the appearance of impropriety, as a conservative and prophylactic measure. (However, these circumstances could be relevant to assessing the defendant's scienter.) Second, the fact that the defendant stated that the absence of a restatement was important to him in an e-mail did not render this information material from the standpoint of an objective investor. Third, senior management's decision not to pre-announce a miss to forecasts based on the initial results for the quarter meant that the information was not material, even though the company did pre-announce a miss later in the quarter.
Assessing whether trading was on the basis of material nonpublic information
The district court tackled some of the difficult issues of what the government must prove vis-à-vis material nonpublic information. It only partially reached these issues because the defendant did not object to a jury instruction which renders illegal trading if made "on the basis of" material nonpublic information. In other words, the court did not consider whether Rule 10b5-1(a), which sets forth the "on the basis of" standard, was proper. The court did consider, and reject, the companion Rule 10b5-1(b), which presumes that one trades on the basis of material nonpublic information when one is aware of that information. According to the court, the Rule 10b5-1(b) standard clearly could not be used in criminal cases, as it "takes an element of the crime, presumes it against the defendant, and effectively converts it into an affirmative defense," in violation of Due Process.
Having reached this point, the district court faced the issue of assessing whether the defendant traded "on the basis of" material nonpublic information. The court agreed with the defendant's proposed jury instruction that a trade is made on the basis of material nonpublic if the information it is a significant factor in the trades, and rejected the government's proposed requirement that the information be "a factor, however small, in the insider's decision to buy or sell." To implement the significant factor instruction, the court looked at the context of the challenged trades. The context included a temporal perspective-how did the trades at issue compare to the defendant's other transactions in the securities of the issuer-and an economic rationality perspective-were the trades aligned with the purported insider knowledge? Under this analysis, some of the defendant's trades did not qualify as having been made on the basis of material nonpublic information. Those trades were economically irrational, as they went in the opposite direction from the defendant's supposed knowledge that the company would report disappointing earnings (he sold puts and later purchased stock). Moreover, all in all, the defendant had been less bearish on the issuer's prospects during the period of these trades than he had been in prior periods, when he had sold more shares.
The district court also touched upon the element of scienter. Here, too, it followed a common sense and practical approach. In particular, it advanced two interesting propositions.
First, the district court reasoned that a belief that information is not nonpublic negates scienter-even if that belief was objectively incorrect. This arose in the discussion of the e-mail referenced above, in which the defendant stated that the absence of an SEC insistence on a restatement was important to him. The court noted that the same e-mail speculated that the SEC's decision had been leaked to the market. According to the court, this provided strong evidence that the defendant thought that the information at issue was not nonpublic. Even if the defendant was mistaken in this belief, he could not have had an intent to deceive by trading upon that information.
Second, the district court reasoned that a subjective belief in the absence of materiality negates scienter -again, even if that belief was objectively incorrect. As noted above, the court found that senior management's decision not to pre-announce a miss to forecasts based on the initial results for the quarter meant that the information was not material. With respect to scienter, the court added that even if senior management was incorrect in its assessment of the lack of materiality, so long as the defendant reasonably and in good faith believed the assessment, it would negate scienter as a matter of law.
The Third Circuit Reversal
On the government's appeal, the Third Circuit reinstated the jury's verdict, and reversed as well the district court's decision to grant a new trial.
The appellate court found sufficient evidence to support the jury's verdict on the three counts on which the district court had reversed. With respect to count one (the alleged agreement to engage in reciprocal tipping), that the co-conspirator allegedly was not sufficiently senior or positioned to qualify as an insider of his company was not a defense to the charge of conspiracy, which does not allow an affirmative defense of legal impossibility. Moreover, the co-conspirator had information on a business transaction involving his company which was not publicly available and which his employer expected him to keep confidential. The mere possession of that information would allow a jury to infer that he was an insider. Furthermore, even if the co-conspirator did not in fact possess material nonpublic information, the jury rationally could have found that there was an agreement to share material nonpublic information, and hence a conspiracy. The co-conspirator had acted in furtherance of the conspiracy by selling stock in the defendant's company at the same time the defendant had sold-even though there was no evidence that the co-conspirator had been tipped with material nonpublic information by the defendant at the time of the sales.
With respect to the second count (the purchase made with knowledge that the company was going to report positive earnings, untainted by a restatement), the government did not appeal the finding that the knowledge of a lack of a restatement was material. The appellate court posited that the defendant's purchase during a closed trading window, coupled with the sale of those shares at a profit after earnings were released, might have sufficed to support the conviction. However, continued the court, it did not need to rely on this trading pattern alone as a basis to affirm the conviction. Rather, the conviction could be supported based on testimony that the defendant usually was privy to financial results weeks before they were released. This circumstantial evidence that he "possessed" the information at the time of his purchase-even without any direct evidence that the defendant actually knew the results-reasonably could have supported an inference of guilt on the part of the jury. The court cited Rule 10b5-1 for the proposition that the government was required to "show that the defendant has traded securities on the basis of material, non-public information" and, without citation, stated that the jury's finding that the defendant "possessed" information sufficed for liability.
With respect to the fourth count (the sales made from May 24 through July 23 with knowledge that the company was going to report negative earnings), the jury's conviction could have been supported by the fact that the CFO had informed the Board that the company would miss its public guidance on June 11, and the defendant traded thereafter. The appellate court did not address liability for the defendant's trades prior to that date, including trades made when the initial results for the quarter were known and senior management decided not to issue an earnings warning. Nor did the court mention the district court's contextual analysis of those trades.
The appellate court also reversed the district court's decision to grant a new trial, on the technical ground that the Rule 33 motion was untimely and the district court could not act sua sponte under Rule 52. As such, the appellate court did not need to reach the question of prosecutorial misconduct, "a question about which we would have some doubt in any event."
Analysis and Implications
Considered on narrow legal grounds, it is not difficult to understand why the Third Circuit felt compelled to reverse Judge Dalzell's opinion. The evidentiary standard for supporting a jury verdict is low, and this was a jury that had decided quickly and decisively (although perhaps under the admonitions of prosecutor misinformed about the securities laws) against an unsympathetic defendant.
Still, the district court had been remarkably astute in analyzing key elements of insider trading liability, and hence it is unfortunate that its decision was reversed. At the outset, the district court's contextual analysis of whether trading is made on the basis of material nonpublic information is a practical approach to considering a difficult legal and factual issue. Considering securities trades in a temporal context is an approach that courts in private lawsuits frequently undertake in assessing whether those trades are suspicious for the purposes of pleading scienter since In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989). Indeed, the application of this approach to the criminal context represents somewhat of a full circle in the law, as the approach was based in part on a regulatory insider trading case. Courts also are familiar with considering whether the economics of securities trades supports or rather contradicts liability. We would hope that in future insider trading cases, courts will be receptive to these types of arguments, notwithstanding the reversal in Heron.
The district court also had grasped the fundamental principle that materiality is objective and scienter is subjective. Both elements must be present for culpability to ensue, and in view of the different mental state associated with each element, it is not enough for there to be a subjective belief in culpability (scienter) without an objective basis for that belief (materiality). The appellate opinion did not address scienter as a separate element of the offense, nor discuss what the defendant may or may not have believed about the materiality or nonpublic nature of the information he was found to have possessed. Hence, the viability of the arguments advanced by the defendant and accepted by the district court remains to be tested, at least where there has not been an adverse jury verdict that may be supportable on other factual grounds.
The most notable portion of the district court's opinion was its recognition of the practical limits to deeming when information is material nonpublic information. It is an "unavoidable reality" that "corporate insiders will always have greater access to information that outside investors," and Congress surely did not intend that corporate officials be forbidden from trading while employed at a company. Moreover, if the only "information" possessed by an insider is that the status quo is still operative-for example, that the company's public forecasts remain viable-it makes no sense to deem this "material nonpublic information" and preclude insiders from trading. The Heron court's common sense on this topic is illustrated, by contrast, to a brief but unsatisfying discussion of the duty to disclose or abstain from trading in the Tenth Circuit's initial decision in Nacchio.
Factual Background in Nacchio
The defendant in Nacchio perhaps was even less sympathetic than the General Counsel charged in Heron: he was the CEO of a telecommunications company who sold millions of dollars in stock before the entire sector crashed. According to the opinion in the case, in September 2000, the CEO increased his company's public revenue forecast for the upcoming year 2001, from $21.3 billion to $21.7 billion. However, an internal analysis opined that the company could make as little as $20.4 billion, or $900 million less than the revised forecast. Moreover, other senior executives informed the CEO that the revenue stream on which the company had depended would soon run dry. The company had relied on selling long-term leases, known as indefeasible rights of use (IRUs), to use space on the company's fiber optic network. The IRUs, in effect, were one-time sales of the same rights the company could have sold over time. The Chief Financial Officer and others determined that the company needed to shift to selling recurring revenue streams, such as the standard consumer phone service, in lieu of the one-time IRUs. The CEO learned from his colleagues that the demand for IRUs was declining, and that the company was well short of increasing its recurring revenue streams to meet its 2001 budget projections.
Nevertheless, the CEO assured investors that the company was on track to meet its public projections. He also sold over one million shares of stock. In October 2000, he announced that he would exercise options that were scheduled to expire, and sell approximately one million shares each quarter. In February 2001, the CEO entered into a formal trading plan to this effect, pursuant to the newly adopted SEC Rule 10b5-1(c). The trading plan was approved by the company's general counsel. However, the CEO publicly canceled the plan less than one month later when the company's stock fell below $38 per share. The CEO contended that this reflected his belief that the company would continue to succeed, and that the stock price would remain above $38.
Notwithstanding his cancellation of the trading plan, the CEO continued to sell. During the next quarterly trading window, between April and May 2001, he sold 1,255,000 shares. At the end of the trading window, the CEO entered into a second 10b5-1(c) trading plan, again approved by the company's general counsel, to sell 10,000 shares per day as long as the price was at least $38 per share. On May 29, 2001, the company's stock price fell below $38. Consequently, the CEO ceased selling shares and made no attempt to sell any more shares other than by exercise of options. Eventually, the company missed its public forecast for the year, as it was no longer able to support its forecast by IRUs. On September 10, 2001, the CEO lowered the public revenue guidance for 2001 by one billion dollars. By September 21, after the markets had re-opened following the 9/11 tragedy, the company's stock price had fallen below 60%.
The Tenth Circuit On The Duty To Disclose Or Abstain
The jury acquitted the CEO for the trades made between January 2001 to March 2001, but convicted him for the trades in April and May 2001. Essentially, the jury found that during the former time period, the company still could have achieved its public revenue forecast for the year 2001; but by the latter time frame, the CEO knew that it could not, because it was too late to make up the downturn in IRUs through recurring revenue sales. A panel of the Tenth Circuit reversed the conviction on the basis that expert testimony regarding the materiality of the information had been improperly excluded. The panel, in turn, was reversed by a divided court en banc, which reinstated the conviction. The majority of the appellate opinions (including all of the en banc opinion) concern the use of expert testimony on the topic of materiality, which is interesting in and of itself. Of interest to the present article, however, is a three paragraph section of the initial appellate opinion that rejected a separate basis asserted by the defendant to reverse the conviction, and which was not considered by the en banc panel.
Formally, the argument asserted by the CEO concerned the exclusion of evidence. In his defense, the CEO argued that he believed the company's economic prospects were more promising than others realized and that it would achieve its public forecast. Specifically, the CEO asserted that he was aware of potential IRU sales to classified government agencies, which if consummated would have allowed the company to achieve its forecasts, notwithstanding the slow sales of recurring revenue.
The district court did not allow the CEO to introduce this evidence, on the grounds that it was classified information. The Tenth Circuit summarily affirmed this ruling in three paragraphs. The appellate court posited that because the CEO could not have disclosed this information at the time he traded (because it was classified information), as supposedly is required under the disclose or abstain rule, he could not disclose it at trial. The court acknowledged that in classic disclose-or-abstain cases such as Securities & Exchange Commission v. Texas Gulf Sulphur, the "insiders were trading in bullish positions ahead of the disclosure of the company's proprietary discovery, and thus their trading correlated with the inside information, while here [the defendant] argues that his possession of classified information neutralizes his possession of other inside information," namely the slow sales of recurring revenue. The court concluded that, if anything, this meant that the CEO had traded with knowledge of two items of material nonpublic information: the classified contract and the negative internal reports.
Comparison of Heron to Nacchio
With all due respect, in considering the difficult issues facing it, the appellate court in Nacchio would have benefited from the common sense approach of the district court in Heron. Had the court done so, it may have recognized the shortcomings of its analysis, and the troubling implications thereof.
At the outset, there is a strong argument that the CEO in Nacchio did not possess any material nonpublic information. Assuming (as did the Tenth Circuit) that the evidence the CEO would have submitted would have shown that the company was still on track to achieve its public forecasts, there was not information to the effect that the company's results would be different than as publicly represented, as in Texas Gulf Sulphur (where corporate insiders knew that their mining company had made a major ore strike, which would add substantial new revenue). Rather, the state of affairs as of the time of the sales for which the defendant was found culpable was nothing more than the status quo: the company's forecast remained valid. As the Heron district court recognized (in discussing the defendant's knowledge that the SEC would not require a restatement), the status quo is not material nonpublic information. This portion of its ruling was not appealed by the government, let alone reversed by the Third Circuit.
The Heron analysis is logical. It is doubtful that no news (i.e., that the status quo is still operative) can constitute news, although some would contend that an affirmation that a prior forecast remains valid is a separate statement on which liability can be predicated. The Tenth Circuit did not follow this logic, assuming instead that the CEO had a duty to disclose both the positive and negative risks to the forecast (and hence had sold while doubly in possession of material nonpublic information). Again, we think the appellate court would have benefited from the common sense approach in Heron. In reality, at any given point in time, there always positive and negative risks to the achievement of a forecast. This is inherent in a forecast, which considers all risks and opportunities to arrive at an achievable midpoint. Indeed, if a company issues a forecast that does not have any downside risks, it runs the risk of over-achieving the forecast and being sued for being too conservative in its guidance.
As there are always risks to a forecast, an insider potentially unlimited liability for trading in his or her company's securities, if any forecast had been made. The Tenth Circuit nevertheless held that the CEO could be liable for not disclosing only a negative risk to the forecast, even assuming (as the CEO would have shown) that the forecast was still viable. The court did not clearly contend that the failure to disclose the risks rendered any public statement false or misleading. To the contrary, the court acknowledged that the company did not publicly break down its revenue by type, such that it had to disclose its continued dependence on IRUs; and it repeatedly asserted that the defendant's crime was nondisclosure, not misrepresentation.
Securities attorneys may differ on whether the appellate court clearly identified the source of any duty to disclose a fact or risk, where there is no affirmative statement rendered false or misleading by the omission. Our point here is that apart from this legal issue, the Nacchio court once again would have benefited from the common sense approach in Heron. In reality, as Heron recognized, corporate insiders always possess information that the general public does not. Moreover, insiders can never disclose everything they know about the company, regardless of whether the information is classified (as allegedly was the case in Nacchio). For example, assume that instead of classified government contracts, the CEO was aware that the company had the promise to snatch a major telecommunications customer from a competitor, which would allow the company to achieve its forecast. Could the CEO have disclosed that information at the time of his stock sales? Almost certainly not: such a disclosure could jeopardize the possibility that the company would secure the new customer in the first place, to the detriment of the CEO's company. Under the logic of Nacchio, then, the CEO could not have sold-and, by extension, no corporate insiders can ever trade in his or her company's securities, given their knowledge of unique but competitively sensitive information, and of the current status of the company's performance.
As we have demonstrated, the district court's opinion in Heron provides practical and logical solutions to difficult issues in insider trading cases. While the court's judgment of acquittal was reversed by the Third Circuit, its logic remains, and provides useful guidance in other cases. In particular, Heron recognizes, as perhaps Nacchio does not, that it cannot be the case that Congress intended to subject all trades by corporate insiders to the potential of criminal liability. The government's prosecutions in both cases, in contrast, have troubling aspects. It is not too much to ask of a prosecutor that he or she not misrepresent the securities laws in arguing to a jury. And it is worrisome that one branch of the government would accuse someone of trading when he knew that the company would not achieve its forecasts without allowing him to explain why he thought the company would achieve its forecasts-especially when other government agencies (the ones with the classified contracts) are the ones blocking from providing that information.
All opinions are those of the authors, and not their firm or its clients. The authors thank Jennifer Lee for her research and editorial assistance.
 TSC Indus. v. Northway, Inc., 426 U.S. 438 (1976).
 See Dirks v. Sec. & Exch. Comm'n, 463 U.S. 646 (1983).
 Compare United States v. Teicher, 987 F.2d 112 (2d Cir. 1987) (suggesting in dicta that "knowing possession" is required), with Securities & Exch. Comm'n v. Adler, 137 F.3d 1325 (11th Cir. 1998) and United States v. Smith, 155 F.3d 1051 (9th Cir. 1998) (government must prove use).
 United States v. Heron, Nos. 08-1061, 08-1622, 2009 WL 868017 (3d Cir. Apr. 2, 2009).
 United States v. Nacchio, 519 F.3d 1140 (10th Cir. 2008); United States v. Nacchio, 555 F.3d 1234 (10th Cir. Feb. 2009) (en banc).
 Heron, 525 F. Supp. 2d at 733-34.
 Id. at 738-9.
 Id. at 741-42.
 Id. at 740-41.
 Id. at 743-44.
 Id. at 745.
 Id. at 744 & n.23.
 Id. at 753.
 Id. at 752.
 Id. at 745.
 Id. at 745-46.
 Id. at 745 & n.35.
 Id. at 742.
 Id. at 747.
 Id. at 748 n.41.
 Id. at 748.
 Id. at 749-50.
 Id. at 742 & n.23.
 Id. at 747 & 39.
 Heron, 2009 WL 868017 at *1
 Id. at *10.
 Id. at **14, 15.
 Id. at *21.
 Indeed, the defendant was incarcerated at the time of his appeal, as he did not contest the denial of his motion for acquittal or new trial on the third count.
 Apple cited three cases in support of the proposition that unusual or suspicious stock sales could support an inference of scienter. One of those cases, Securities & Exchange Comm'n v. Musella, 578 F. Supp. 425 (S.D.N.Y. 1984), was a regulatory insider trading prosecution in which bond traders immediately bought securities in four companies after being tippedabout undisclosed mergers or acquisitions involving those companies by an office manager at law firm. The bond traders traded only in stocks of companies involved in undisclosed transactions associated with tippee's law firm, investing substantial sums in those isolated trades. In the other two cases cited by Apple, the temporal circumstances also were dramatic. In Lilly v. State Teachers Retirement Sys. of Ohio Pension Fund, 608 F.2d 55 (2d Cir. 1979), a company pre-disclosed expected financial results to a brokerage firm, which "almost immediately thereafter" published a secret report for its clients, one of whom immediately sold 80,000 shares of the company's stock in an unusual and hastily arranged offering). In Jeffries & Co. v. Arkus-Dunton, 357 F. Supp. 1206 (S.D.N.Y. 1973), an officer-director sold 80% of his holdings one day before the NYSE suspended trading, two days before the SEC suspended trading, and immediately after discussing a surprise government audit and imminent trading halts.
 Nacchio, 519 F.3d at 1144-45.
 Id. at 1145.
 Id. at 1146.
 Id. at 1147.
 Nacchio II, 555 F.3d at 1236
 Id. at 1157.
 401 F.2d 833 (2d Cir.1968).
 Id. at 843-44.
 See, e.g., 519 F.3d at 1145 ("it was not Qwest's policy to disclose the portion of its income attributable to IRU sales.").
 The court repeatedly returned back to the duty to disclose all material information or abstain from trading, which one may contend is a circular argument, as it does not identify what constitutes material nonpublic information. The court's analysis also begs the question: what if the company had not made any forecasts at al