Court curbs insider trading
Ruling makes cases easier to prosecute
Washington — The Supreme Court sought to crack down on insider trading Tuesday, ruling unanimously that tips passed between relatives and friends are illegal even if the corporate insider receives no financial benefit.
The decision marked the first time the high court had clarified what constitutes insider trading in nearly two decades, and it upended a legal standard set by a New Yorkbased federal appeals court in 2014 that had made prosecutions more difficult. The decision was written by Justice Samuel Alito.
“Giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds,” Alito wrote.
Wall Street has been watching the case carefully for a sign of where the justices stand on the issue. The earlier case, which the high court refused to hear, made it almost impossible to obtain convictions unless prosecutors pre-
sented evidence showing the tipster received a direct benefit. The high court called that decision “inconsistent” with its precedents.
Requiring that insiders get rewarded didn’t sit well with most of the justices during oral argument in October. In some instances, Justice Stephen Breyer said, “to help a close family member is like helping yourself.”
Federal prosecutors have used a 1983 rule, similar to the one agreed upon by the justices, to convict both corporate insiders and the people they tip off. Maintaining such a rule, Justice Elena Kagan said last month, was important to maintain “the integrity of the markets.”
The case involved a chain of information passed from one brother working at Citigroup to another brother and then Bassam Salman, a future brother-in-law who ultimately netted $1.7 million in stock trades. Salman was convicted under the
decades-old standard, but his lawyer argued that Congress had never defined insider trading.
“Making a gift of inside information to a relative ... is little different from trading on the information, obtaining the profits and doling them out to the trading relative,” the court ruling said. “The tipper benefits either way.”
U.S. Attorney Preet Bharara, the prosecutor for the Southern District of New York whose office obtained 80 insider trading convictions in recent years, called the ruling “a victory for fair markets and those who believe that the system should not be rigged.”
The 2014 ruling by the U.S. Court of Appeals for the 2nd Circuit overturned the convictions of Todd Newman and Anthony Chiasson, two former hedge fund portfolio managers. The threejudge panel concluded that prosecutors presented insufficient evidence of “any personal benefit” received by the alleged insiders who shared secret information.
The reversals were also based on a finding that prosecutors did not
present evidence to show that Newman and Chiasson knew they were trading on information obtained from insiders who violated their “fiduciary duties” to keep the material secret.
Differentiating the case against the former hedge fund managers from the Salman case, the Supreme Court said Newman and Chiasson had been “several steps removed from the corporate insiders” who leaked information and had not been accused of knowing the leakers’ identities.