The U.S. Supreme Court handed white-collar prosecutors a victory by upholding the conviction of a man who traded on insider information that came from his brother-in-law. But the court rejected the government's more expansive view of insider-trading law, sticking to a decades-old precedent requiring prosecutors to prove the tipper received some benefit -- even the intangible benefit of rewarding family and friends -- in exchange for inside information.
The court's unanimous decision in Salman v. U.S. chips away at Newman v. U.S., the 2014 ruling by a federal appeals court in New York that reversed the convictions of two hedge-fund executives who traded on information without knowing the ultimate source or whether he received a benefit for it. When the tipper and tippee are linked by close ties of family or friendship, the Supreme Court ruled today, a benefit can be assumed.
"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," wrote Justice Samuel Alito, a former assistant U.S. Attorney in New Jersey.
The court avoided overturning Newman entirely, however, saying in a footnote that in Newman the government failed to prove the traders knew the source of their information or whether the source received a benefit for it. Since Bassam Yacoub Salman knew his information was coming from Maher Kara, a Citigroup investment banker who was also his brother-in-law, "this case does not implicate those issues." Maher actually gave the tips to his brother Michael, without knowing Michael forwarded the information to Salman. Salman was convicted for making more than $1,5 million in trading profits on inside information.
“It kind of takes away half of Newman, but not the other half,” said Joshua Newville, a partner with Proskauer in New York and former senior counsel in the Securities and Exchange Commission division of enforcement. Prosecutors still have to prove suspects "know or have some reason to suspect there was a violation of a fiduciary duty by an insider.”
In a statement, U.S. Attorney Preet Bharara, the prosecutor in the Newman case, hailed the decision, saying the Supreme Court "unanimously and ‘easily’ rejected the Second Circuit’s novel reinterpretation of insider trading law in U.S. v. Newman." That may be going a bit too far -- the decision rejects only the implication that under Newman, prosecutors must prove knowledge of a benefit in cases involving friends and family.
The decision may not affect professional traders who pay for information without knowing the ultimate source, therefore. But past court rulings have given prosecutors a fair amount of leeway to go after people who pay for information that clearly had to come from an insider in breach of a duty, Newville said.
Today's opinion hews narrowly to Dirks v. SEC, a 1983 decision that requires prosecutors to prove that the recipient of insider information knew the tipper provided it in breach of a duty of confidentiality, and that the tipper received some benefit for it. In Dirks, the court held that "the disclosure of confidential information without personal benefit is not enough," but that benefit can be inferred “when an insider makes a gift of confidential information to a trading relative or friend.” In that case the tipper presumably receives the intangible benefits of an enhanced reputation or the promise of future favors.
