Supreme Court Rules On Insider Trading For First Time In 20 Years: Why It Matters
On Tuesday morning, the U.S. Supreme Court, ruling in an insider trading case for the first time in two decades, upheld the conviction of a Chicago man – Bassam Salman – in a decision that could make it easier to prosecute people accused of profiting from confidential information.
The justices, in a unanimous 8-0 decision, ruled against Salman, who was appealing a 2013 conviction stemming from federal charges that he made nearly $1.2 million trading on non-public information that came from his brother-in-law at Citigroup Inc. In the ruling, the justices found that people can be sent to prison for making trades even when the insider who provided the tip wasn’t trying to make money, a key point of contention in previous cases. The court said it’s enough if the insider gave the information as a gift.
Salman had argued that prosecutors in insider trading cases must prove that an alleged source of corporate secrets like the brother-in-law received a tangible benefit like cash in exchange for any tips, something his brother-in-law did not receive. Such proof, prosecutors have said, would make it more difficult for authorities to pursue insider trading cases, potentially preventing cases in which executives tip friends or relatives without any getting anything tangible in return.
Writing for the court, though, Justice Samuel Alito said the court rejected Salman’s arguments, ruling that friends and family members could be held liable even if a tipper provides inside information as a “gift.”
“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,” Alito wrote.
Prosecutors said Maher Kara, a Citigroup investment banker and Salman’s brother-in-law, provided tips about deals involving Citi clients to Kara’s brother, who in turn tipped Salman. A federal jury in San Francisco in 2013 found Salman guilty of conspiracy and securities fraud charges, and he was sentenced to three years in prison.
The Supreme Court heard Salman’s appeal on Oct. 5 amid competing rulings by federal appeals courts in San Francisco, where his case was heard, and New York, where a wave of insider trading prosecutions has been pursued recently.
* * *
The ruling sets an important precedent, and comes at a much needed time for Wall Street prosecutors who have seen a series of adverse ruling go against the prosecution in recent years, weaking cases against Wall Street insider traders to the point where one could almost make a case for the EMH. As Bloomberg adds, the court’s decision should provide a new road map for Wall Street traders and rule enforcers. It came down to this: If tippers don’t get something tangible in exchange for information, can anyone be convicted? The court said yes.
The New York-based 2nd U.S. Circuit Court of Appeals in 2014 overturned the conviction of two hedge fund managers, Todd Newman and Anthony Chiasson, and narrowed prosecutors’ ability to pursue such cases in the process.
That ruling adopted a narrow definition of what constituted an illegal benefit to an insider, and forced prosecutors under Manhattan U.S. Attorney Preet Bharara to drop charges against 12 other defendants, out of 107 people charged since 2009.
As Reuters adds, Salman had relied on the 2nd Circuit’s ruling to argue that he could not be convicted because no proof existed that Kara received anything beneficial in return. The San Francisco-based 9th U.S. Circuit Court of Appeals rejected that position, and in Thursday’s ruling, Alito said that to the extent the 2nd Circuit’s ruling could be read that way, the holding was “inconsistent” with Supreme Court precedent.
* * *
For anyone still confused, here is a rundown from Bloomberg laying out the importance of this ruling (it remains to be seen if any prosecutor will now take advantage of it to crack down on present and future insider trading).
1. What was at stake?
The decision affects whether the government can mount aggressive crackdowns in the future. A ruling against the government could have led to the reversal of some recent convictions.
2. What case was before the court?
Bassam Salman was convicted of trading on tips from his brother-in-law, Michael Kara, who got the confidential information from his brother, a health-care investment banker at Citigroup. The Kara brothers were particularly close. Both brothers pleaded guilty to conspiracy to commit securities fraud and each was given three years probation. A California jury convicted Salman and a judge sentenced him to prison for three years. The San Francisco appeals court, by a 2-1 decision, upheld the ruling. He was free on bail while the Supreme Court considered his appeal.
3. What law is Salman accused of breaking?
Insider trading occurs in part when a person in possession of information about a company that isn’t available to the public trades on it, making a profit or avoiding a loss. There isn’t in fact a specific statute outlawing insider trading. Instead, judges have said that insider trading is a form of securities fraud, for which there is a statute. Through the decades, judges’ decisions have defined what the government must prove in an insider-trading case.
4. Why did the Supreme Court hear this case?
Probably because the law needed to be clarified. The court never says why it’s taking a particular case, but under its rules a major consideration is whether federal appeals courts are in conflict. That was the case with insider trading. A federal appeals court in New York ruled in 2014 that people who trade on confidential information could be prosecuted only if the insider responsible for the leak reaped a concrete benefit. The following year, a San Francisco-based court disagreed and said the government didn’t need to prove a tangible benefit. Salman’s lawyers highlighted this conflict when they asked the Supreme Court to intervene.
The Reference Shelf
- The court’s decision.
- The June 2015 oral arguments in U.S. v. Bassam Salman before the U.S. Court of Appeals for the Ninth Circuit, and the court’s July 2015 decision upholding Salman’s conviction.
- This Bloomberg graphic details the U.S. government’s seven-year effort to convict 91 people.
- QuickTake explainers on the Supreme Court and why insider trading is so hard to prove.