On June 21, 2022, Israel’s Supreme Court rejected the appeal of two appellants against their conviction and sentencing by the Tel Aviv District Court for insider trading. The court evaluated the objectives of criminal punishment for insider trading offenses and the social impact that conviction of such offenses might have, and rejected civil compensation as an alternative to criminal conviction for insider trading. (CrimA 5830/21 Roi & Tal Cohen v. State of Israel.)
District Court Decision
The conviction centered on the acquisition of shares of the public company Biondvax Pharmaceuticals Ltd. by the second appellant based on information provided to him by his brother, the first appellant, regarding the company’s intention to conduct a joint experiment with the U.S. Department of Health and Human Services. The first appellant was able to obtain the information due to his relationship with the CEO of Biondvax during the period preceding the publication of the information.
The appellants were sentenced to three and nine months’ imprisonment respectively, to be served as community service, as well as fined. In addition, they were sentenced to nine and twelve months’ imprisonment respectively, which would be suspended unless they committed another offense of the same type within three years of the date they were originally convicted. (CrimC (DC TA) 68475-07-18 (Nevo Legal Database by subscription).)
Supreme Court Decision on Appeal
The main decision of the court was issued by Justice Alex Stein with Justices Shaul Shohat and Noam Sohlberg concurring.
Penalty for Insider Trading
In accordance with section 52D of the Securities Law, 5728-1968, as amended, “the use of insider information that has come into a person’s possession, directly or indirectly, from an insider in the company” is an offense, punishable by two years of imprisonment or a fine of 188,250 Israeli new shekels (about US$53,467). This amount is 2 ½ times the amount that may otherwise be imposed for offenses punishable by imprisonment for one to three years under section 61A(3) of the Penal Law, 5733-1977, as amended.
Consideration of Social Impact of Sentencing on Persons Convicted of Insider Trading
While determining that the nine months’ imprisonment served as community service imposed on the second appellant was a moderate penalty that did not merit reversal, the Supreme Court acknowledged the serious consequences of this criminal conviction on his personal life and professional career.
The court was informed that if his conviction was not overturned, he would not be able to obtain an entry visa to the United States and “fulfill his dream of studying for an MBA at the prestigious School of Business Administration of Stanford University; he would also not be allowed to stay with his wife, who was expected to live in the United States in the coming years — also for the purpose of completing academic studies and building a professional career.”
According to Justice Alex Stein, the social sanction accompanying the criminal conviction in the appellant’s case had serious consequences for the appellant’s future owing to the appellant’s young age and the fact that the success in the field in which he chose to engage depended on his ability to travel to the United States for academic studies and obtain vocational training in a prestigious institution.
The social consequences of a conviction, however harsh, Stein held, could not constitute grounds for reducing the sentence of a person found liable in a manner that would thwart the purposes of criminal punishment, chief among them retribution and deterrence. Sentencing a defendant, including by imposing a monetary fine in the framework of a criminal proceeding, Stein clarified, was only possible following a criminal conviction.
Stein rejected the possibility of imposing payment of damages without conviction under section 77 of the Penal Law. Such compensation might be awarded solely in favor of “a person harmed by an offense.” The appellant’s actions, Stein determined, did not harm any specific person who bought or sold securities on the stock exchange at the time of the offenses. Trade in securities using insider information, according to Stein, was an offense that damaged the credibility of the capital market as a whole and the willingness of investors to invest in securities. The victims of such a crime were, therefore, the state and all its residents, who were deprived of receiving to the fullest extent the advantages of a reliable and efficient capital market.
Stein rejected the possibility of this appellant paying substantial compensation to the state treasury, which would represent the general public, without a conviction. Such an arrangement would require the court to “recognize a complex legal doctrine of parens patriae (“the state as guardian”). … [Recognizing the doctrine for the purpose of providing] first aid to a crime victim — as opposed to an independent and full tort claim — is … not suitable for such a significant judicial process.”