Insider trading and the invention of a prohibition
In a discussion of the legal history of Rule 10b-5, Don Boudreaux told Bob Zadek that insider trading was not illegal in the United States until about 1961, and that Congress has never made it illegal. During the debates of the 1930s over the Securities Act and the Securities Exchange Act, Boudreaux said, there were proposals to make insider trading illegal, but even that Congress did not do it; instead the Securities Exchange Act of 1934 contained Clause 10b, directed against securities fraud. Zadek flagged the word: “Fraud. Fraud. And that’s an important distinction.” Boudreaux agreed it was against fraud, and described how William Cary — a Columbia University professor of law whom John Kennedy appointed to head the Securities and Exchange Commission — advanced the theory that Section 10b, a broad prohibition of securities fraud, could be interpreted as a prohibition on insider trading. In Boudreaux’s account, Congress never said insider trading was illegal; the prohibition came from a bureaucrat at the SEC, and although Congress could have overturned it and the courts have largely accepted it, insider trading had been perfectly legal within his own lifetime Legalize Insider Trading (2009).
Ray Dirks and Equity Funding
Zadek recounted the story of Ray Dirks, a stockbroker in the 1970s who received a call from a man named Secrest, an employee of the life insurance company Equity Funding. Secrest, angry over being shorted on his Christmas bonus, told Dirks the company was a fraud — that employees held insurance policy writing parties on weekends to write phony policies to satisfy regulators and auditors. Dirks investigated, confirmed the fraud, and took the story to the Wall Street Journal, which declined to go public; he went to the SEC, which would not move. He then told his institutional clients to sell Equity Funding. He made no money, the company collapsed, and its president went to jail. The SEC censured Dirks for sharing inside material non-public information. He fought the censure to the US Supreme Court, where Ronald Reagan’s Solicitor General took on the SEC, and the Court held that Dirks had done nothing wrong and removed the censure. Zadek called Dirks a hero and said the episode showed how random the “crime” is and how arbitrary the enforcement: the SEC sat on the story and did not act, the auditors did not act, and Dirks was censured. Boudreaux said the agency that holds itself out as the great protector of investors and the great guard against fraud was not doing its job, while the supposedly wrongful act of trading on inside information did the anti-fraud work Legalize Insider Trading (2009).
Fraud on the court
In a discussion of litigation against Red Emmerson and Sierra Pacific, Joel Engel described how defense attorneys kept uncovering wrongdoing by investigators, who he said wanted to look only under the lamppost because the light was better there. A great deal of circumstantial evidence pointed to a young man as having started the fire, and he had volunteered self-incriminating statements and told easily discoverable lies, but investigators never looked at him, Engel said, because putting the fire on a young man with no assets would mean no cost recovery. Right before trial, Engel said, the lead US attorney told the federal judge in a brief that there was not a scintilla of evidence pointing to anyone else’s guilt but Sierra Pacific. Zadek characterized this as a fraud perpetrated on the court itself — an attorney with a powerful duty to the judge intentionally misleading the judge — and said that because the government acts in the name of the people, the public is implicated in such behavior [[episodes/joel_engel_on__scorched_worth__a_true_story_of_des|Joel Engel on Scorched Worth: A True Story of Destruction, Deceit, and Government Corruption, 6/3 (2018)]].
Mail fraud and the federalization of crime
Harvey Silverglate told Zadek that, except in Louisiana, the states operate under the English common law system, in which crimes like larceny and assault and battery have been defined by hundreds of years of judicial decisions, so that everyone understands what stealing is. By contrast, he said, mail fraud is a vague notion of a fraud committed by the use of the mails. Because the feds control interstate communication, almost everything done by telephone or mail can arguably violate a federal statute. Silverglate said the US Supreme Court could have stopped the growth of federal criminal jurisdiction but enabled it, buying into the notion that use of the means of interstate commerce or communication turns a classic common law crime into a federal crime. The common law notion, he said, is that a person can be prosecuted for knowingly violating a clear obligation; now a person can get 10, 15, or 20 years in federal prison for doing something a prosecutor can convince a judge is a fraud. He said mail fraud is in the eye of the beholder and dangerous to liberty, and that he himself had been investigated because he is a high-profile civil liberties and criminal defense lawyer The FBI: Our Uninvited Federal Police Force (2022).
Fraud in racial classification
David Bernstein told Zadek that racial classification in university admissions is basically an honor system in practice: he did not see a single example anywhere in the United States of a student being penalized for putting down a classification other than what someone else thought they were. In government contracting affirmative action programs and in employment, by contrast, there have been instances where a boss or a government bureaucrat questioned a claimed identity — asking, for example, how someone named John Smith could be Hispanic — and where further evidence was required. The penalty in government contracting, Bernstein said, has basically been loss of the status, with no real penalty otherwise. He said there was a lot of fraud involving Native American heritage, and eventually the Department of Transportation passed new regulations requiring membership in a tribe to reduce the fraud because it was so prevalent. In the employment context, he said, there are examples of people being fired for writing down the wrong ethnic classification, either because a judge found they had no basis for the claim or because a settlement defined Hispanic in a way the person did not meet Exploring the Borderlands of Legal Whiteness with David Bernstein (2022).
Election fraud and the National Popular Vote
In a discussion of the Electoral College and the National Popular Vote, a guest said that allegations of fraud in elections occur, but under the Electoral College a fraud allegation in a state like Illinois or Pennsylvania will not usually change who is elected president, because it is unlikely that a particular state will have turned everything; the year 2000 in Florida was the opposite case, where one state could have changed the outcome. Under a National Popular Vote system, the guest said, every state’s votes would have to be counted very carefully, and there would undoubtedly be litigation in almost every state about whether votes were counted properly, with allegations of fraud going through the courts and eventually probably to the Supreme Court, so that the country might be without a president for a long time Will We Know Who the President Is on November 4? (2020). Zadek framed the surrounding discussion of mail-in voting by distinguishing an absentee ballot, initiated by a voter who requests one, from mail-in voting as a change in state policy, in which the state takes it upon itself to mail a ballot to everybody.
Across episodes
The topic is touched in the 2009 episode on insider trading, the 2018 episode on Scorched Worth, the 2020 episode on the presidential election, the 2022 episode on legal whiteness, the 2022 episode on the FBI, and the 2022 episode on the Inflation Reduction Act. The excerpts show no single developing argument across them: the 2009 episodes treat fraud as the narrow hook (Section 10b) from which insider trading law was improvised and as the label attached to a whistleblower’s censure; the 2018 episode treats it as a fraud on the court by a prosecutor; the 2022 FBI episode treats mail fraud as a vague federal crime displacing common law definitions; the 2022 legal whiteness episode treats it as misrepresentation in racial self-identification; and the 2020 election episode treats it as an allegation whose consequences depend on the electoral system. The 2022 Inflation Reduction Act episode mentions fraud only inside Zadek’s framing question about free-market rules, and the excerpt breaks off before the guest responds.
What the sources do not cover
The excerpts do not supply a general legal definition of fraud, nor do they state the elements of any fraud offense, the text of any statute, or the holding of any case beyond what the speakers describe. They do not give the dates of the Cady, Roberts memorandum, the Dirks litigation, or the Department of Transportation regulations beyond relative phrases like “a few years ago.” They do not report the outcome of the Sierra Pacific litigation or of any election-fraud allegation, and they do not state whether any of the described conduct was ever charged or adjudicated as fraud.