WASHINGTON – The Supreme Court on Wednesday seemed likely to preserve the government’s broad power to crack down on insider trading on Wall Street.
Most of the justices suggested during arguments in a closely watched case that insider trading violates the law even if the person supplying corporate secrets to a friend or relative doesn’t receive anything of value in return.
The high court is expected to resolve a conflict among lower courts that has raised doubts about the scope of insider trading laws. A 2014 ruling from the federal appeals court in Manhattan threw out the conviction of two prominent hedge fund managers and forced prosecutors to drop charges against several others.
In the current case, the high court is deciding whether to overturn the conviction of Bassam Yacoub Salman, an Illinois man convicted of making investments based on inside information he received from a member of his extended family.
Government officials say the free sharing of corporate secrets with friends or relatives is just as damaging to the nation’s securities markets as trading inside information for a cash benefit.
Critics say the government has been overzealous and that prosecutions should be limited to insiders who make secret profits from revealing confidential data. A ruling against the government could hinder anti-corruption efforts that have netted more than 80 arrests and 70 convictions for insider trading over several years.
But nearly all the justices asking questions Wednesday appeared to agree with the government that passing inside information as a gift to a family member still gives benefits to the person giving the tip.
“You certainly benefit from giving to your family,” said Justice Anthony Kennedy. “It ennobles you and, in a sense, it helps you financially because you make them more secure.”
Justice Stephen Breyer said helping a close family member “is like helping yourself.”
Salman earned more than $1.5 million in profits from trading on nonpublic information he received about future health care deals. The source was Maher Kara, Salman’s brother-in-law and an investment banker at Citigroup Global Markets in New York.
Kara did not share the information directly with Salman. Rather, he offered it to his own brother, Michael, who then gave it to Salman. But Salman was aware that Kara was the source. Kara pleaded guilty to conspiracy and securities fraud charges.
At issue is how to interpret a 1983 Supreme Court case that said insider trading violates the law when the insider “personally will benefit” from sharing the information. The benefit can be financial — such as a cash reward — but it also applies when an insider offers secrets for free to a relative or friend.
That would seem to apply directly to Salman’s case. But the landscape of insider trading law changed two years ago, when the federal appeals court in Manhattan overturned the conviction of hedge fund managers Todd Newman and Anthony Chiasson after finding they were too far removed from inside information to be prosecuted.
The Manhattan court said Newman and Chiasson got their information through a chain of people who didn’t have a close personal relationship with them.
The Supreme Court earlier this year declined to take up the government’s appeal of the New York case. But Breyer on Wednesday expressed doubts about the ruling, saying it “is really more likely to change the law that people have come to rely upon.”
Salman’s lawyer, Alexandra Shapiro, trying to rely on the New York case, told the justices that Salman committed no criminal violation. She said Maher Kara gave the information to his brother without seeking any kind of financial reward. A federal appeals court in San Francisco rejected that argument last year and the justices did not seem likely to overturn that ruling.
Justice Elena Kagan said Salman was asking the Supreme Court to upend decades of settled precedent, a move that could damage confidence in the financial markets.
“You are asking us essentially to change the rules in a way that threatens that integrity,” she said.
Justice Department lawyer Michael Dreeben told the justices that an insider does gain a personal advantage even when sharing inside information as a gift.
“The advantage that you receive is that you are able to make a gift with somebody else’s property,” he said.
Some justices wondered where to draw the line between an insider tip that is meant to be a free gift and an offhand social comment that unintentionally could be used to make a trade. Chief Justice John Roberts said it seemed like a “hazy line to draw” between the two scenarios and suggested some clarity may be needed.