Justices Tackle Blurry Insider-Trading Lines

     WASHINGTON (CN) – The Supreme Court struggled Wednesday with how to compare monetary benefits and less tangible, interpersonal benefits in a case that could disrupt the way the government prosecutes insider trading.
     At the heart of the case before the nation’s highest court 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 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 Supreme Court Wednesday 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.
     “Petitioner’s ‘pecuniary gain’ limitation would seriously harm investors and damage confidence in the fairness of the nation’s securities markets,” the government said in its brief. “Favored tippees could reap instant, no-risk profits at the expense of stockholders free from securities-law liability.”
     The Supreme Court Wednesday struggled with balancing these two competing concerns during oral arguments that saw the justices question both sides extensively.
     The arguments revolved around the Supreme Court’s 1983 decision in Dirks v. SEC, which established the standard by which future courts should assess insider trading liability. Salman’s attorney advocated for a more narrow reading of the Dirks decision, while the government said the case is important for protecting faith in the markets.
     Both the liberal and conservative justices on the court pressed each side to explain its position, making it difficult to determine which way the court leans.
     When Salman’s attorney Alexandra Shapiro was at the podium, the justices pressed her to explain why doing something for personal benefit cannot be just as valuable as doing it for monetary gain.
     Justice Stephen Breyer wondered why financial disclosure forms would require people to list their family members if there is no public interest in knowing how an individual’s family member might benefit from their connections.
     “And of course I can suggest a reason,” Breyer told Shapiro. “Because they think very often, though it depends on families, to help a close family member is like helping yourself. That’s not true of all families, but many, it is.”
     Justice Elena Kagan brought that argument further and offered Shapiro a hypothetical in which the justice wanted to give a family member a gift but couldn’t afford it.
     If she walked by a co-worker’s desk, saw a $100 bill sitting there unattended and decided to take the bill and use it to buy the gift, surely she would be benefitting. So why should it be different if, instead of a $100 bill, she found and took insider information from her coworker’s desk and gave that to a family member as a gift, Kagan asked.
     “I’m stealing information to give a gift to somebody I know,” Kagan said. “It might be, as in this case, a family member. It might be a friend. And I benefit from that because I personally benefit. It’s the exact opposite of using corporate information for corporate purposes. I’m using it for my own personal purposes.”
     Deputy Solicitor General Michael Dreeben, who represented the United States, repeated a similar line during his time at the podium.
     “The advantage that you receive is that you are able to make a gift with somebody else’s property,” Dreeben said told Breyer.
     But Shapiro repeatedly pushed back at the idea that a gift always gives some personal benefit, arguing that some disclosures do not reach the level of insider trading.
     “Your honor, that would be true in virtually any instance one could think of where an insider disclosed confidential corporate information, whether it’s in a business setting or, as is often the case, a mixed social and business setting,” Shapiro responded to Kagan. “Analysts talk to company insiders all the time, and it’s essential to the free flow of information to the marketplace that occurs.”
     Shapiro did note that she wasn’t asking the court to determine whether insider trading can only occur when money changes hands, only that the government must prove the insider received a tangible real benefit and not the soft interpersonal benefit it claimed in Salman’s case.
     The idea is not to let insiders skate on insider trading claims, Shapiro insisted, but to make it clear what traders can and cannot do – a clarity that does not exist currently.
     “I think the issue is that there has to be a clear line,” Shapiro said. “We’re dealing with a crime that was never defined by Congress.”
     While some of the justices seemed reluctant to make the insider trading test as rigid as Shapiro would like, they also struggled with just how much of a benefit the government has to prove changed hands to constitute insider trading and just how close the relationship between the tipper and the tippee would need to be.
     Chief Justice John Roberts challenged Dreeben on where the line is between insider information given to a friend as a gift and a tip gleaned from a simple social interaction.
     If a group of friends decided to go away for the weekend but one had to stay back because he was “working on this Google thing,” the friend’s offhand comment could not be considered a gift if someone in the group traded based off of it, Roberts claimed.
     “You wouldn’t call that a gift,” Roberts said. “You’d call it a social interchange. And maybe it’s, you know, something he should have been more careful about saying, but it’s quite different than a gift.”
     Dreeben said he would not consider the information shared in that exchange to be a gift because the person revealing the information received no reward.
     But Roberts warned such a distinction can be difficult to find.
     “It’s hazy,” Roberts said. “It’s kind of a hazy line to draw, isn’t it, between something that you characterize as a gift and something that would be characterized as social interaction, isn’t it?”
     Justice Samuel Alito took the hypothetical into even more dicey territory, asking Dreeben if an insider who gave confidential trading information to a stranger on the street just because he had a “really unhappy look on his face” would violate insider trading laws.
     Dreeben said it would because the insider gave the information to a third party for non-corporate reasons.
     “I think that Dirks adopted the basic line that sets forth the duty of loyalty, which is well established, that when you are given something for corporate purposes, you may not use it for personal reasons,” Dreeben said.

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