Insiders ‘Back On The Hook’ After Top Court’s Trading RulingBy , , and
Court makes it easier to bring cases against traders
Decision is ‘victory for fair markets,’ Bharara says
For two years, stock traders and the attorneys who represent them said insider-trading law was a muddle, with no one knowing exactly what was or wasn’t legal. On Tuesday, the U.S. Supreme Court said it had “easily” settled the question.
No one doubted that a trader who paid cash to an insider for privileged information faced prison. But what about the trader who got the tip from a friend or golfing buddy as a mere gift? Is it illegal to trade on that?
In a unanimous decision, the Supreme Court declared that it is. And that eliminated the confusion that had plagued insider-trading law since December 2014, when a New York-based appeals court made it harder for prosecutors to bring such cases.
"The Supreme Court’s decision is pretty simple,” said Peter Henning, a law professor at Wayne State University Law School in Detroit. “The Supreme Court said today that the law is what we always thought it was” -- that simply making a gift of inside information “can trigger insider-trading liability."
In other words, Henning said, both the CEO who makes a gift of secret news to his brother-in-law on the back nine, and the brother-in-law himself, remain at risk for an insider-trading conviction -- even if there was no cash exchanged between the two.
“Golf buddies, roommates and others are back on the hook,” Henning said.
The ruling came in the first insider-trading case to be considered by the Supreme Court in two decades and answered a question that had divided federal appeals courts. It restored some, though not all, of the leverage lost by prosecutors and the Securities and Exchange Commission in the 2014 case, which led to the dismissal or reversal of more than a dozen criminal cases.
“The court stood up for common sense and affirmed what we have been arguing from the outset -- that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public,” U.S. Attorney Preet Bharara in New York said in an e-mailed statement. “Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”
The decision likely undercuts efforts by some Wall Street figures to overturn their insider-trading convictions. Among those watching the case were former Goldman Sachs Group Inc. director Rajat Gupta, hedge-fund manager Doug Whitman, Galleon Group co-founder Raj Rajaratnam and ex-SAC Capital Advisors fund manager Matthew Martoma.
Some of them have been trying to overturn their convictions on grounds that the Supreme Court soundly rejected on Tuesday -- that tippers must get a tangible benefit to be at risk of prison. The justices said the benefit need not be “something of a pecuniary or similarly valuable nature.”
The “conclusion that a benefit had to be tangible is out,” Henning said.
The decision is unlikely to have an impact on the SEC’s approach to insider trading, said enforcement chief Andrew Ceresney. “We’ve been pretty aggressive in the insider-trading area,” he said after the ruling. The decision “is consistent with that and we’ll continue to be aggressive.”
The ruling comes in the case of onetime Chicago grocery wholesaler Bassam Yacoub Salman. Prosecutors in California said Salman and a partner earned more than $1.5 million in profits through trades based on inside information. The government said the tips originated with Maher Kara, then a Citigroup Inc. investment banker, who gave the information to his brother, who in turn passed it on to his brother-in-law, Salman.
The Supreme Court case centered not on Salman’s conduct, but on Kara’s motivations.
“By disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients,” Justice Samuel Alito wrote.
Federal securities-fraud statutes don’t specifically mention insider trading, but in 1983 the Supreme Court said prosecutions could be based on an insider’s breach of a duty to the company’s shareholders. The ruling, known as Dirks v. SEC, said the insider had to receive a “personal benefit” from the disclosure.
Alito said the Dirks ruling “easily resolves” the Salman case.
“Dirks specifies that when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift,” Alito wrote. “In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”
Although the high court ruling represents a victory for the government, it doesn’t address a second part of the New York court’s 2014 ruling -- one that also makes it tougher for prosecutors to prevail. That panel said that prosecutors must also prove the person trading on the information knew that it came from an insider who received a personal benefit.
In the Salman case, a Justice Department lawyer told the justices during arguments in October that government attorneys still must show that the trader knew the information came from someone who was breaching a duty to a company’s shareholders.
One thing Tuesday’s ruling didn’t do was reinstate convictions that were tossed out after the 2014 ruling, including those of fund managers Todd Newman, Anthony Chiasson and Michael Steinberg.
“His case is finished and he stands properly acquitted,” Chiasson’s lawyer, Greg Morvillo, said.
— With assistance by Benjamin Bain