Supreme Court justices routinely caution against drawing any conclusions about the court's views when it declines to review a lower court decision at the behest of the losing side in the case. Even so, the advocates and experts worried about insider trading felt a frisson of disappointment a year ago when the court declined to hear the government's appeal of a decision by the federal appeals court in New York making it harder to prosecute those cases.
The disappointment hardened into anxiety a few months later when the court agreed to hear an appeal in a California case by a defendant who had cited the New York decision in an unsuccessful effort to overturn his conviction. Court watchers saw the decision to hear the case, Salman v. United States, as an indication that justices across the ideological spectrum might want to narrow the expansive reading of the broadly worded insider trading laws.
For insider trading hawks, however, the story has a happy ending. In a unanimous decision last week [Dec. 6], the court held that it is a crime to trade on nonpublic information passed on by an insider relative or friend even if the so-called "tipper" gets no money, nothing but good will, for the leak. The ruling upheld the conviction of Bassam Salman, who made more than $1.5 million in profits by trading on the basis of tips about pending health care mergers and acquisitions passed on by his brother-in-law, an investment banker at Citigroup in San Francisco.
In its decision in the New York case, the Second U.S. Circuit Court of Appeals had ruled that insider trading was not illegal unless the tipper received "a potential gain . . . of a pecuniary or similarly valuable nature." The hedge fund manager defendants in United States v. Newman had picked up tips from loose-lipped Wall Street bankers, who leaked valuable tips about future earnings reports from high-tech companies and were never prosecuted themselves.
The prosecutors never established the bankers' motives for the leaks. Perhaps they felt a sense of self-importance as they showed they were in the know. Or maybe they even hoped for some kind of payback, in good will or maybe in U.S. currency. Under the Second Circuit's decision, however, they were not criminals and neither were the "tippees" who used the information to outsmart the general trading public.
The New York case was brought by the office of U.S. Attorney Preet Bahrara, the prosecutorial scourge of Wall Street who reportedly has agreed to remain in office under the next administration. The Second Circuit said that Bahrara had prosecuted the hedge fund managers under "a doctrinal novelty," but in its decision last week the Supreme Court specifically said that Newman was "inconsistent" with the high court's underlying precedent.
Admittedly, the court's foundational decision in Dirks v. Securities and Exchange Commission (1983) is less than crystal-clear. Insider trading liability attaches, the court held, only if the tipper receives "a personal benefit" from breaching a fiduciary duty to keep information confidential. The petitioner in that case, investment broker Raymond Dirks, won a reversal of his censure by the SEC for telling institutional investors about apparent fraud by a big insurance company.
In the new decision, the Supreme Court reaffirms Dirks but without adding much by way of clarity. "Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to 'a trading relative,'" Justice Samuel A. Alito Jr. wrote in the 12-page opinion upholding the Ninth Circuit's decision to affirm Salman's convictions.
The crime in this case started innocently enough. Maher Kara followed the health care industry for Citigroup and started sharing information about the industry with his older brother Mounir Kara when their father was battling cancer. One thing led to another: Mounir (known as Michael) started trading on the information and he then started feeding the information to Salman, a friend who eventually married Maher's sister.
Maher Kara eventually figured out that his brother and Salman were trading on the information, but he did not stop the leaks. Eventually, both Kara brothers pleaded guilty to insider trading and testified at Salman's 2013 trial, where he was convicted on multiple counts and sentenced to three years' imprisonment and $730,000 in restitution.
In New York, federal prosecutor Bharara expressed approval of the new decision. “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,” Bharara said in a statement emailed to news media. “Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”
Interestingly, the court heard from an array of groups on Salman's side and only two backing the government about the harm to the public from insider trading. In its amicus brief, the libertarian Cato Institute argued that the "personal benefit" theory is "vague" and "unpredictable" and that it actually "chills beneficial economic activity" by leaving insiders uncertain about the legality of disclosing market-relevant information.
Alito's spare opinion rehearses none of that debate. But the court deserves credit for reaffirming a sensible rule, albeit difficult to enforce, to limit insiders' ability to rig the market for the benefit of friends and family.