At first glance, the 24-pages of orders issued by the Supreme Court on November 10, 2014, appear to be nothing more than the usual proscriptions, including a long list of cases for which the Supreme Court has declined to consider further appeals.  However, at the end of a perfunctory list of certiorari denials is a three-page Statement by Justice Scalia, joined by Justice Thomas, issuing a clear challenge to the deference afforded to the SEC’s interpretation of federal securities laws in criminal cases.

Last Monday, the Supreme Court declined to grant review of a Second Circuit decision upholding the petitioner’s 2012 conviction for insider trading.  Although the Court denied the petition, Justices Scalia and Thomas noted that the petitioner’s case raised a separate concern: “Does a court owe deference to an executive agency’s interpretation of a law that contemplates both criminal and administrative enforcement?”

Section 10(b) of the Securities Exchange Act bars securities fraud, including insider trading, but the statute has both criminal and administrative applications, and is therefore enforced by both the DOJ and SEC.  Further complicating matters, as an executive agency, the SEC can enact Rules under § 10(b), and its interpretations of the statute have traditionally been provided with deference pursuant to Chevron USA v. Natural Resources Defense Council.

In fact, a key case the Second Circuit relied on to uphold the petitioner’s insider trading conviction adopts the SEC’s interpretation of § 10(b) in United States v. Royer.  The Royer court held that defendants violate the law when they trade while in “knowing possession” of nonpublic information material to the trades at issue, as opposed to requiring proof that defendants actually “used” such information in making the trades.  In settling on this standard, Royer noted that the SEC had adopted a “knowing possession” standard in Rule 10b5-1, and thus  essentially used Chevron deference from civil enforcement to bootstrap onto the criminal application of § 10(b).

Justice Scalia’s Statement took square aim at this issue, warning that such deference to agency interpretations “can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain.”  Though the petitioner did not seek review on the issue of deference in the petition for certiorari, the Justices indicated that the Court might be receptive to reviewing the issue in the future.

In the wake of  this Statement, one can expect that the Government will think twice about the cases it relies upon to establish violations insider trading laws, as Justice Scalia has arguably cast a pall over precedent in criminal insider trading cases that could be perceived as overly deferential to the SEC’s interpretation of § 10(b).