High Court Justices Voice Support for Insider-Trading Cases

  • Justices hear arguments on issue for first time in 20 years
  • Court could restore legal leverage to Wall Street prosecutors

Supreme Court May Refine Rules on Insider Trading

U.S. Supreme Court justices suggested they will make it easier to prosecute Wall Street figures for insider trading as the court heard arguments on the subject for the first time in two decades.

Taking up the conviction of onetime Chicago grocery wholesaler Bassam Yacoub Salman, the justices weighed Wednesday whether someone can be sent to prison for making trades when the insider who provided the tip wasn’t looking to make any money. A majority of the eight justices indicated a willingness to uphold the conviction.

A victory for the government would be a boost for prosecutors and the Securities and Exchange Commission, restoring some of the leverage they lost in 2014 when a federal appeals court in Manhattan imposed new requirements on government lawyers. The New York court’s ruling undercut U.S. Attorney Preet Bharara’s eight-year crackdown on Wall Street cheating and led to more than a dozen insider-trading convictions being thrown out.

Justice Stephen Breyer said that ruling had changed decades-old rules for insider trading by requiring prosecutors to show that the insider received a concrete benefit. Salman’s lawyer is urging the court to adopt that standard nationwide.

Raj Rajaratnam

Photographer: Peter Foley/Bloomberg

"Obviously the integrity of the markets are a very important thing for this country," Justice Elena Kagan told the lawyer, Alexandra Shapiro. "And you’re asking us essentially to change the rules in a way that threatens that integrity."

To read a QuickTake Q&A on insider trading, click here

Rajat Gupta

Photograph: Victor J. Blue/Bloomberg

Among those watching the Supreme Court case are former Goldman Sachs Group Inc. director Rajat Gupta, hedge fund manager Doug Whitman and Galleon Group co-founder Raj Rajaratnam. All are trying to overturn their convictions on related grounds.

Leon Cooperman

Leon Cooperman

Photographer: Andrew Harrer/Bloomberg

Omega Advisors founder Leon Cooperman also could be affected. The SEC accused him last month of buying shares in Atlas Pipeline Partners after obtaining insider information. He told investors in a letter that federal prosecutors in New Jersey were also investigating but advised him they wouldn’t pursue charges for now, pending a ruling in the Supreme Court case.

Prosecutors 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 centers not on Salman’s conduct, but on Kara’s motivations. A San Francisco-based federal appeals court said Salman could be convicted even if Kara received no concrete benefit and merely gave his brother the information as a gift.

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 said the insider had to receive a "personal benefit" from the disclosure.

‘Making a Gift’

Justice Anthony Kennedy said Wednesday that he read that ruling, Dirks v. SEC, as allowing prosecution when the insider gave the information without expecting compensation.

"Dirks says there is a benefit in making a gift," Kennedy said.

Shapiro said the court should "limit this crime to its core," which she described as "the insider’s abuse of confidential corporate information for personal profit." She said Kara gave the information to his brother only because he was being "pestered."

That argument got little traction at the eight-member court. Breyer said it was hard to distinguish an insider who directly profited from one who tipped off a family member.

"To help a close family member is like helping yourself," Breyer said. "That’s not true of all families, but many it is."

Pestered Brother

Justice Ruth Bader Ginsburg said Kara benefited, even if only by making his bothersome brother go away.

"He is no longer being pestered," Ginsburg said. "Isn’t that a benefit?"

Justice Samuel Alito provided the strongest support for Salman, questioning Justice Department lawyer Michael Dreeben’s contention that a gift was sufficient to warrant prosecution.

"It doesn’t seem to me that your argument is much more consistent with Dirks than Ms. Shapiro’s," Alito said.

A ruling favoring the government would only partially undo the New York court ruling’s impact on Wall Street. The government won’t be able to revive cases that have already been dismissed -- like the one against SAC Capital Advisors LP’s Michael Steinberg.

In addition, the Supreme Court isn’t taking on a key part of the Newman ruling: its requirement that prosecutors prove the person trading on the information knew that it came from an insider who received a personal benefit.

Dreeben, the Justice Department lawyer, said government attorneys still would have to show that the trader knew the information came from someone who was breaching a duty to a company’s shareholders.

The case is Salman v. United States, 15-628.

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