- High court will consider what constitutes a personal benefit
- Move `doesn't bode well for government,' ex-prosecutor says
A banker tips his brother to a deal, who in turn passes the news to his brother-in-law. Is it insider trading merely because they’re related? Or must prosecutors show the banker received something of value from his brother or brother-in-law in return for the leak?
The U.S. Supreme Court on Tuesday agreed to resolve that question as it accepted a major new insider-trading case. Its ruling will clarify an issue that goes to the heart of a federal crackdown over the past eight years.
Under insider-trading law, prosecutors must show that a tipster received a “personal benefit” for leaking information. That much is clear. Now, the Supreme Court will define that term. Does it mean that the tipster received something concrete, like cash, in return for the tip? Or is it enough that the insider and the recipient of the tip share a close family relationship?
Appellate courts have split on the question. In July, a San Francisco-based court ruled in the appeal now before the high court that the personal relationship is enough -- a decision that was favorable to prosecutors. A New York-based panel, considering another case, reached a different conclusion in December 2014.
That case, which also addressed another issue in insider-trading law, led to the reversal of more than a dozen convictions and spurred prosecutors to warn that the floodgates to illicit trading would open.
“What the Supreme Court ultimately decides on this personal benefit issue will have significant ramifications for future prosecutions,” said David Miller, a former assistant U.S. attorney in Manhattan who is now a partner at law firm Morgan Lewis & Bockius LLP. “It’s a big deal.”
The justices will hear an appeal from Bassam Salman, an Illinois man convicted of using tips leaked to him by his brother-in-law, who got the information from his brother, a Citigroup Inc. investment banker. The San Francisco-based court said the relationship between the banker and his brother was enough to constitute insider trading.
The court’s decision to take up the appeal by Salman may be a setback to prosecution advocates and hint at skepticism toward the government’s position. The Obama administration in 2015 asked the Supreme Court to review the New York decision. The justices rejected that appeal without comment in October, leaving intact a ruling that prosecutors roundly criticized. This time, the administration urged the Supreme Court not to intervene, aiming to preserve Salman’s conviction and a favorable opinion from the San Francisco court.
The Supreme Court in recent years has narrowed the scope of some criminal statutes in ways that favored defendants, according to Samuel Buell, a former federal prosecutor who is now a professor at Duke University School of Law.
"This doesn’t bode well for the government," he said.
Miller disagreed, saying prosecutors may prevail in the high court. The court, he said, may use the Salman case to make clear that insiders can’t leak information to close relatives or perhaps friends on the golf course.
“The Supreme Court is possibly picking up this case to remind courts that a gift of confidential information to a close relative or friend is sufficient to satisfy the personal benefit standard,” Miller said.
U.S. Attorney Preet Bharara in New York, whose prosecutors racked up 80 insider-trading convictions during an eight-year attack on fund managers, corporate insiders and consultants, declined to comment on the decision to hear the San Francisco case.
Jill Fisch, a professor at the University of Pennsylvania’s School of Law, said the Supreme Court may have elected to hear this case, and not the New York case, because it’s more representative of the typical insider-trading prosecution.
The New York case involved a chain of professional traders passing information to one another while this one involves friends and family.
"You’ve got hundreds of insider trading cases in which an insider tells a husband, a wife or a child some inside information," said Fisch. "Those cases are in the core of impermissible insider trading.”
The case is Salman v. U.S., 15-628.