Supreme Court Says “Gifts” Still Count as Insider Trading
On Tues., Dec. 6, 2016, the Supreme Court ruled 8-0 to uphold the conviction in "United States v. Salman," a victory for federal prosecutors who police wrongdoing on Wall Street. (AP Photo/Pablo Martinez Monsivais)
The Supreme Court on Tuesday sent a clear message that insider trading laws are violated when corporate insiders give a “gift” of confidential information to a family member or friend — a victory for prosecutors who police illegal dealings on Wall Street.
The 8-0 decision helps answer the question of whether anyone who shares insider information must receive a tangible benefit — like cash — in order to be found guilty of insider trading. The court, in its first insider-trading case in nearly two decades, said that even if the tipster wasn’t trying to profit, the law is violated when such confidential information is provided as a gift to someone who’s likely to trade on it.
The ruling centered around the case of Bassam Salman, a Chicago grocery wholesaler who was convicted in 2013 after profiting more than $1 million off of trading tips from his brother-in-law, Maher Kara. Maher, who worked as an investment banker in Citigroup’s healthcare division, shared information about upcoming mergers and acquisitions with his brother, Michael. Michael, in turn, fed tips to Salman.
Salman was convicted of securities fraud and sentenced to three years in prison. While appealing his conviction, Salman argued that he was not criminally liable for insider trading because his brother-in-law, Maher, did not receive any “personal benefit” or money for providing the tip.
Salman’s attorneys based his appeal on a 2014 decision from the U.S. Court of Appeals in the Second Circuit in New York, United States v. Newman, that narrowed a definition of insider trading. The Newman decision suggested that prosecutors should be able to prove beyond a reasonable doubt that insiders personally benefitted from disclosing confidential information.
The Newman decision led to confusion over what constitutes insider trading, and dealt a blow to Preet Bharara, the U.S. attorney in Manhattan whose crackdown on illegal dealing in the hedge fund industry was the focus of the 2014 FRONTLINE investigation To Catch a Trader. In the wake of the ruling, Bharara’s office was forced to toss out more than a dozen convictions.
In a statement, Bharara said that the Supreme 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.”
The Supreme Court’s ruling overturns parts of the Newman decision and re-opens the door for prosecutors to pursue cases where an insider shares tips with a relative or friend. The decision came almost two years to the day that the Newman ruling was handed down.
“The last two years were just a nightmare and now the nightmare’s over,” said Peter Henning, a professor of law at Wayne State University, who authors The New York Times column, White Collar Watch. “The Justice Department did not like having to show a tangible benefit, especially because, sometimes, that’s hard to show.”
Henning added that the Supreme Court “didn’t want to create what looked like a very strange loophole for insider trading — that as long as you make sure that it was just a pure gift to a relative, you could give them all the inside information that you wanted and they could make as much money as they wanted.”
In the court’s opinion, Justice Samuel Alito, wrote that the “narrow issue” presented by the Salman case is “easily” resolved by the landmark 1983 Supreme Court case Dirks v. SEC, which found that a tipper breaks the law when he or she benefits personally from disclosing information. Personal benefit, according to Dirks, can be inferred when a person gets something valuable in return for a tip or “makes a gift of confidential information to a trading relative or friend.”
“Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother. It is obvious that Maher would personally benefit in that situation,” Justice Samuel Alito wrote in yesterday’s opinion. “But Maher effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it.”
“Making a gift of inside information to a relative like Michael is little different from trading on the information, obtaining the profits, and doling them out to the relative. The tipper benefits either way,” he added.
While working at Citigroup’s healthcare investment banking division, Maher would often turn to his older brother, Michael, to help understand scientific concepts related to his job, according to court records. The brothers often talked about companies that worked with innovative cancer treatments while their father was battling cancer. Maher then began to share information with Michael about upcoming mergers and acquisitions, sometimes using code words to avoid getting caught. Michael fed information to others, including Salman.
The two brothers pleaded guilty to securities fraud in 2011 and testified at Salman’s trial.