Every criminal offense has a series of “elements” or facts that the government must prove beyond a reasonable doubt. A strong defense sometimes consists of an attack on just a single element of the crime.
In a recent dismissal of an SEC action for insider trading out of the Northern District of Illinois, the district court pointed out this important, but sometimes forgotten point: no matter what the crime, no matter what the implausible story an accused gives for his or her actions, the government must prove each and every element of an alleged offense.[1]
In the case, a Spanish investor made an extraordinarily “lucky” bet on the future price of an American publically traded company. Within days of buying a large number of call options, the company’s stock jumped on news of a possible acquisition. The investor’s options increased in value by over 1000%.
The investor provided the SEC with a dubious explanation of his “luck”: he’d never traded in the industry before, never traded options, cited research that was released after his purchase to explain his investment decision, and offered a far different, technical explanation much later in the case. Further, the investor threw away one of his computers and “scrubbed” the hard drive of another used to make the trades. Further still, another Madrid-based trader made similar trades and admitted culpability in the matter.
This evidence of insider trading, though circumstantial (i.e. indirect) seems very persuasive. However, the SEC could provide no evidence that the investor had “material non-public information obtained from an insider,” elements needed to prove the offense. Without knowing or having had contact with an insider, the court determined there was no way the government could prove the investor obtained information from an insider. In other words, the government missed an element of the offense, the facts of “obtained from an insider” could not be proven.
Sometimes the government’s most “slam dunk” cases are the ones where they miss an element. A competent defense attorney will take care to make sure the government always proves each and every element of a crime.
[1] SEC v. Sanchez, Dist. Court, ND Illinois 2011, No. 10 CV 5268. (This case involved a civil SEC action, but the lesson of proving each element remains the same as though it were a criminal offense).