Supreme Court sets tough insider trading rule

WASHINGTON -- The Supreme Court sought to crack down on insider trading Tuesday, ruling unanimously that tips passed between relatives and friends are illegal even if the corporate insider receives no financial benefit.

The decision marked the first time the high court had clarified what constitutes insider trading in nearly two decades, and it upended a legal standard set by a New York-based federal appeals court in 2014 that had made prosecutions more difficult. The decision was written by Justice Samuel Alito.

"Giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds," Alito wrote.

Wall Street has been watching the case carefully for a sign of where the justices stand on the issue. The earlier case, which the high court refused to hear, made it almost impossible to obtain convictions unless prosecutors presented evidence showing the tipster received a direct benefit. The high court called that decision "inconsistent" with its precedents.

Requiring that insiders get rewarded didn't sit well with most of the justices during oral argument in October. In some instances, Justice Stephen Breyer said, "to help a close family member is like helping yourself."

Federal prosecutors have used a 1983 rule, similar to the one agreed upon by the justices, to convict both corporate insiders and the people they tip off. Maintaining such a rule, Justice Elena Kagan said last month, was important to maintain "the integrity of the markets."

The case involved a chain of information passed from one brother working at Citigroup to another brother and then Bassam Salman, a future brother-in-law who ultimately netted $1.7 million in stock trades. Salman was convicted under the decades-old standard, but his lawyer argued that Congress had never defined insider trading.

"Making a gift of inside information to a relative ... is little different from trading on the information, obtaining the profits, and doling them out to the trading relative," the court ruling said. "The tipper benefits either way."

U.S. Attorney Preet Bharara, the prosecutor for the Southern District of New York whose office obtained 80 insider trading convictions in recent years, called the ruling "a victory for fair markets and those who believe that the system should not be rigged."

Bharara has made Wall Street insider trading prosecutions a focus of his tenure. However, the 2014 ruling by the U.S. Court of Appeals for the 2nd Circuit overturned the convictions of Todd Newman and Anthony Chiasson, two former hedge fund portfolio managers. The three-judge panel concluded prosecutors didn't present enough evidence of a "personal benefit" received by the insiders who shared secret information and did not prove a close relationship linked the leakers and the hedge fund executives.

The 2nd Circuit decision ultimately led to seven other dismissals of insider-trading convictions won by Bharara's office.

Gregory Morvillo, who represented Chiasson in the appeal, said the Supreme Court ruling would not have changed the ultimate dismissal of that case because prosecutors didn't prove the tipper received a sufficient personal benefit for breaching corporate secrecy duties. As a result, the former hedge fund officials could not have known about any benefit, said Morvillo.

Bharara characterized the mid-level appeals court ruling as "a novel reinterpretation" of insider trading law. The new decision "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," said Bharara.

John Zach, a former prosecutor in Bharara's office, predicted that unless Congress approves a formal insider trading law, "we will continue to see these same issues play out in the courts."

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc

USA TODAY


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