Chiarella v. United States and its Indelible Impact on Insider Trading Law

Abstract

The case of Chiarella v. United States occupies a special place in history. It was the first prosecution under the federal securities laws for the crime of insider trading. And the U.S. Supreme Court’s iconic holding—regarding the circumstances under which insider trading constitutes securities fraud—not only profoundly changed the law in 1980 but also continues to define insider trading’s contours right up to the present day.

While the case is famous, important aspects of Chiarella have gone unnoticed or been long since forgotten. This essay sets out to explore these aspects in order to better understand how a seemingly mundane SEC settlement involving just over $30,000 in ill-gotten gains morphed into the groundbreaking insider trading prosecution and Supreme Court decision. The exploration draws from a close analysis of the civil and criminal litigation record as well as interviews with most of the principal attorneys involved in the case at its various stages.

Chiarella’s backstory suggests that the case’s indelible impact results as much from its lawyering as from the ruling announced by the Court in its landmark decision.

Keywords: Insider Tradintg, Chiarella, Rule 10b-5, Securities Fraud