United States v. Smith: The use-possession debate in SEC enforcement actions under 10(b)

The U.S. Supreme Court has yet to address an underlying issue in the evolut ion of insider trading law: whether Rule 10b-5 liability should attach when someone trades while "in the possession of" material, nonpublic informatio n, or whether a more stringent standard of having actually used or traded " on the basis of" such information must be met. In United States v. Smith, t he Court of Appeals for the Ninth Circuit held that a violation of Rule 10b -5 requires an actual causal connection between the possession of inside in formation and the decision to trade in securities. This Note argues that th e court erred in dismissing the knowing possession standard in favor of ado pting an actual use standard. Although a causal connection between inside i nformation and trading is an element of the Rule 10b-5 offense, this Note a rgues that knowing possession alone sufficiently satisfies the scienter and "to use and employ" elements of 10(b) to establish the causal connection. The knowing possession standard finds support in the statutory interpretati on of 10(b), analogous anti-fraud provisions, judicial and administrative p recedent, and the policy objective of achieving an honest securities market through full disclosure of material nonpublic information.