Supreme Court effectively broadens definition of insider trading

Prosecutors can prove someone committed insider trading without proving they received anything in return for leaking nonpublic information to an investor, the justices ruled.

First Look

In a ruling that could fortify efforts to root out Wall Street corruption, the US Supreme Court settled conflicting appellate court decisions Tuesday by affirming a broader interpretation of insider trading.

Prosecutors can legally prove that a tipster engaged in insider trading without also needing to prove that the tipster received something of value in return for leaking nonpublic information to an investor, the eight justices said in their unanimous decision. While some observers cautioned that the ruling's impact would be minimal, prosecutors and regulators praised the decision as affirming their work to hold the financial sector accountable.

"The decision reaffirms our ability to continue to aggressively pursue illegal insider trading and bring wrongdoers to justice," Securities and Exchange Commission (SEC) Chairman Mary Jo White told The Wall Street Journal.

Tuesday's ruling, which upheld the conviction of an Illinois man who earned more than $1.5 million in profits trading on nonpublic information from his brother-in-law, limited the impact of a 2014 ruling in which the US Court of Appeals in Manhattan had doused aggressive anti-corruption prosecutions. Authorities there had made more than 80 arrests and secured 70 convictions on insider trading over several years, until the Second Circuit ruled that a tipster must receive something of value in order to commit insider trading. 

Consequently, Manhattan US Attorney Preet Bharara dropped some cases and delayed others. After Tuesday's decision, however, he celebrated, describing the development as a straightforward rejection of the Second Circuit's "novel reinterpretation of insider trading law."

"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," Mr. Bharara said in a statement. "Today’s decision is a victory for fair markets and those who believe that the system should not be rigged."

Writing for the court, Justice Samuel Alito favored an interpretation of insider trading as applied by the Ninth Circuit in San Francisco, which heard an appeal in the Illinois man's case, as The New York Times reported. Maher Kara, an investment banker at Citigroup Global Markets in New York, had leaked nonpublic information about forthcoming health care deals to his brother who then passed it on to the defendant, Mr. Kara's brother-in-law Bassam Yacoub Salman – whose conviction the justices upheld Tuesday.

"By disclosing confidential information as a gift to his brother with the expectation that he would trade on it," Justice Alito wrote, "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."

Providing nonpublic information to a trading relative is illegal, even as a gift, Alito wrote.

"To the extent that the Second Circuit in [the 2014 case] held that the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to a trading relative, that rule is inconsistent" with the law, Alito wrote.

But the implications of this ruling should not be overstated, some noted. Bloomberg View columnist Matt Levine, a former Goldman Sachs investment banker, argued that Bharara's celebration of Tuesday's news "isn't quite right" because the Second Circuit's decision, like the Ninth Circuit's, was a straightforward application of longstanding understandings of insider trading rules. The Supreme Court merely "pared back" some of the "intemperate language" in the Second Circuit decision, he wrote.

"None of this, really, is news; none of these decisions have changed the law," Mr. Levine wrote. "The law has remained consistent since 1983, except for the brief period when Bharara was able to expand it to cover trades without any personal benefit."

There's a significant but nuanced difference between someone who solicits nonpublic information and someone who simply does their research before investing, and that difference is something those less familiar with the inner-workings of the financial sector might misconstrue, Levine wrote:

Legally, conceptually, this is all pretty easy stuff. Insiders who corruptly misuse corporate information to benefit themselves and their buddies are guilty of insider trading. Investment analysts who diligently research companies, including by calling up the companies and asking them questions, are not. There are some gray areas, but in most practical cases you can tell which is which. But prosecutors, jurors and even some judges can't quite believe it. They want insider trading law to be about fairness, to vindicate the idea that "the system should not be rigged," and to punish fat-cat hedge fund managers who get more access to companies than the average investor. That's not what the law is, really, but because the law doesn't match up very well with the average person's intuitions, it will always feel a bit unstable. Even if it never really changes that much.

Tuesday's ruling is expected to affect the case against Leon Cooperman, a high-profile hedge fund manager who was accused earlier this year of trading illegally on confidential information.

Material from The Associated Press was included in this report.