High Court Declines to Narrow Insider-Trading Standard

(CN) – The Supreme Court ruled unanimously Tuesday that sharing insider-trading tips with friends or relatives is against the law even if the person giving the tip doesn’t get money in return.

At the heart of the case is Bassam Salman, a grocery wholesaler from Chicago who made nearly $2 million from trading tips he received secondhand from an investment banker.

Salman received the nonpublic trading tips from Michael Kara, who in turn got them from his brother Maher, an investment banker at Citigroup’s healthcare division. Maher originally just talked to Michael about his job to get his brother’s opinion on health matters, but over the course of time Michael pressed Maher for more and more details and became more forceful in his requests.

Michael and Salman became close after Maher proposed to Salman’s sister. Shortly after, Michael began passing the information he got from his conversations with Maher to Salman, who then traded based off of these tips.

The U.S. Justice Department eventually cracked down on Salman for insider trading when his accounts – which actually belong to his wife’s sister – boomed.

Salman was found guilty on four counts of securities fraud and one count of conspiracy.

He claimed the charge of insider trading was unfounded because Maher received no monetary benefit from the tips passed on to Salman, and appealed his conviction to the Ninth Circuit.

The Ninth Circuit held, however, that dolling out information can benefit an insider’s relationship with his family or friends, and that the insider doesn’t necessary have to benefit financially for his actions to be considered insider trading.

But Salman argued before the U.S. Supreme Court in October that the charge of “insider trading” is made up entirely by judges, and goes well beyond what Congress intended in the Securities Exchange Act. He warned against adding to the law without legislative action.

“The Ninth Circuit’s indeterminate psychological-benefit ‘standard’ provides so much flexibility that it would effectively allow the government to usurp Congress’ role to define the crime,” Salman wrote in a brief to the court.

For its part, the government argued in briefs that restricting the benefit necessary to prove insider trading to monetary gain would be damaging to laws meant to preserve faith in the financial markets.

On Tuesday, the Supreme Court unanimously affirmed the Ninth Circuit, ruling that Salman was properly convicted of insider trading.

“Dirks [v. SEC] 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. 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,” Justice Samuel Alito wrote for the nation’s high court. “Here, 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—a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.”

The justices rejected Salman’s argument that the gift-giving standard in 1983’s Dirks decision is unconstitutionally vague.

“At most, Salman shows that in some factual circumstances assessing liability for gift-giving will be difficult,” Alito wrote. “That alone cannot render ‘shapeless’ a federal criminal prohibi­tion, for even clear rules ‘produce close cases.’”

Manhattan U.S. Attorney Preet Bharara called the decision a “victory for fair markets and those who believe that the system should not be rigged.”

“The U.S. Supreme Court unanimously and ‘easily’ rejected the Second Circuit’s novel reinterpretation of insider trading law in U.S. v. Newman,” Bharara said in a statement. “In its swiftly decided opinion, 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.”