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Did Rakoff’s Rando Circuit Judge Swap Lead to SCOTUS Insider Trading Decision?

Dec. 16, 2016, 7:12 PM

A fortuitous panel assignment in the Ninth Circuit allowed District Court Judge Jed Rakoff to craft the decision that ultimately unseated a ground-breaking insider trading opinion from his home circuit.

The U.S. Supreme Court sided with the retired New York judge Dec. 6 when it held that a close relationship between a tipper and tippee can be enough to impose insider trading liability in Salman v. United States .

The high court overruled a contrary Second Circuit decision, United States v. Newman , which held that more was needed to show that the tipper received a “personal benefit” from leaking the information.

But before the Supreme Court stepped in, an unlikely turn of events led to Rakoff — a critic of theNewmandecision — being assigned to sit on the Ninth Circuit appeals court panel that was considering the “remote tipper” problem. Rakoff’s opinion provided the circuit split that may have convinced the Supreme Court to review the issue.

The assignment happened through a federal judge-sharing program in which judges who have taken senior status help out in overburdened circuits, Rakoff, himself a senior federal judge, told Bloomberg BNA.

There’s some evidence of past “panel packing"— stacking a panel to influence the legal result — inintra-circuit panel assignments, where district court judges help fill in within their own circuits.

Butinter-circuit assignments like Rakoff’s are much more random, typically occurring before the clerk even knows which cases will be heard by that panel, according to the U.S. Court of Appeals for the Ninth Circuit’s Appellate Practice Guide .

Siding With the Ninth

It all starts withNewman.

In December 2014, the U.S. Court of Appeals for the Second Circuit — arguably the foremost arbiter of securities litigation among federal courts — reversed the insider trading convictions of two portfolio managers. The court did so, in part, because the government hadn’t shown a sufficiently close relationship between the tipper and tippee to infer that the tipper received any kind of “personal benefit” from leaking the nonpublic information (see related story).

That decision rocked the world of white collar crime, as it now seemed harder for the government to prosecute insider trading cases.

Rakoff — himself a leading authority on securities and white collar crime — criticized theNewmanruling shortly after it was issued. In April 2015, Rakoff saidNewman’s reasoning wasn’t “obvious” and suggested it was actually inconsistent with Supreme Court precedent.

A couple of months later, Rakoff sat as a visiting judge in a Ninth Circuit case that dealt with the remote tippee problem addressed inNewman.

The Ninth Circuit didn’t follow the Second Circuit’s reasoning.

Newmanisn’t binding on the Ninth Circuit, Rakoff, writing for the court, said in United States v. Salman . “But we would not lightly ignore the most recent ruling of our sister circuit in an area of law that it has frequently encountered.”

Still, Rakoff and the court found that the Second Circuit’s determination that “evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit” departed from Supreme Court precedent. A close relationship was sufficient for insider trading liability, Rakoff said.

The conflicting cases were both appealed to the U.S. Supreme Court. The high court turned awayNewman, but later agreed to hearSalman, which had by then created a circuit split.

On Dec. 6, the Supreme Court sided with the Ninth Circuit inSalman.

The decision meant Rakoff helped overturn, at least in part, his own circuit.

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Case Overload

Rakoff has sat by designation in the Ninth Circuit before. That’s not surprising, given the Ninth Circuit’s caseload.

More than a quarter of the 44,768 cases pending in federal appeals courts on June 30, 2016, were pending in the Ninth Circuit (13,368 cases), according to the Administrative Office of the U.S. Courts .

As the largest circuit, the Ninth Circuit has an overload of cases, Rakoff told Bloomberg BNA.

As such, the Ninth Circuit receives the most help from visiting judges.

In 2015, 103 judges from other circuits “sat by designation” on the Ninth Circuit, helping decide 1,145 cases on the merits, the AO said .

In 2016, “visiting judges sat on 9.1 percent of cases decided on the merits,” David J. Madden, the Ninth Circuit’s Assistant Circuit Executive, San Francisco, told Bloomberg BNA in an e-mail. “By comparison, the average use among all circuits is 3.7 percent,” he said.

Desirable Destinations

Rakoff said he doesn’t see a problem with non-local judges adjudicating appellate cases.

All the judges sitting by designation are federal judges, he said.

Moreover, the longstanding practice is that only one judge on the three judge panel can be a visiting judge, Rakoff said.

In fact, visiting judges can add “some helpful outside perspectives to the court,” David Lat , a former Ninth Circuit clerk and the founder of Above the Law , told Bloomberg BNA in an e-mail.

He pointed toSalmanas an example.

“I’m sure the Ninth Circuit panel that heard theSalmancase appreciated the insights of Judge Jed Rakoff, one of the federal judiciary’s leading experts on insider trading and white-collar crime,” Lat said. It “might have helped the Ninth Circuit get affirmed by the Supreme Court, which is not something you see every day,” he added.

The Ninth Circuit has a reputation for being frequently reversed by the Supreme Court.

It’s “also viewed by visiting judges as a desirable court to sit on by designation,” Lat said. “The cities where it usually hears cases — Los Angeles, San Francisco, Seattle, and Portland — are some of the best destinations in the country.”

‘Ceaseless and Effective.’

So how does a judge get an assignment in one of these desirable places? The first place to look is 28 U.S.C. §§291-296, “which is the statute that governs inter and intra circuit assignments,” David Sellers, of the Administrative Office of the U.S. Courts, Washington, told Bloomberg BNA in an e-mail. The Chief Justice of the United States is required to “maintain a roster of retired judges of the United States who are willing and able to undertake special judicial duties from time to time outside their own circuit,” under Section 294(d) .

When a court needs a visiting judge, the “chief judge of the borrowing circuit signs a Certificate of Necessity, which, not surprisingly, represents that an out-of-circuit judge is needed for a particular case, location or time period,” then-Chief Judge Alex Kozinski explained in In re Motor Fuel Temperature Sales Practices Litig .

Although the courts can work among themselves to identify visiting judges, in practice, “the Committee on Intercircuit Assignments and its fine staff at the Administrative Office of the United States Courts, operates more informally — and usefully — as a clearinghouse for judges willing to take out-of-circuit assignments and circuits needing judicial help from visiting judges,” Kozinski said.

“As a circuit that’s perpetually short of judicial officers, particularly in the district courts, the Ninth Circuit is a frequent beneficiary of the committee’s ceaseless and effective efforts,” he added.

To contact the reporter on this story: Kimberly Strawbridge Robinson in Washington

To contact the editor responsible for this story: Jessie Kokrda Kamens at

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