An Assault on Insider Trading Law Appears to Have Been Rebuffed
At Wednesday’s oral argument in a key insider-trading case the most decisive voice was one that didn’t speak: that of the late Justice Antonin Scalia.
Judging from a transcript of the hearing, a misguided assault on insider-trading prosecutions looks likely to be rebuffed. But beyond that important news, we saw yet another stark example of how Justice Scalia’s sudden death last February has dramatically transformed the Court, and not just by turning five conservative-leaning votes into four.
It is hard not to speculate about how the argument would have gone in the case of Bassam Salman v. United States if the outspoken justice—who died one month after the Court decided to take the matter up—had still been on the bench. He was the dog that didn’t bark at Wednesday’s proceedings, and his silence was deafening.
A mere recitation of the essential facts of the Salman case powerfully conveys the remarkable extent to which the core law against insider trading has come under attack. I challenge the lay reader to even guess what the Court could have thought was questionable about the prosecution’s seemingly slam-dunk, shave-and-a-haircut case against Salman.
Salman was a wholesale grocer. His sister married a man named Maher Kara who was an investment banker with Citigroup working in the healthcare arena. Investment bankers get access to their corporate client’s confidential inside information about deals that are being contemplated and they are forbidden from disclosing that information to anyone.
Maher had a beloved brother, Michael. Michael pestered him to tell him material nonpublic information Maher learned in his position. Though Maher knew he was violating Citigroup’s rules, he gave his brother the information to get him “off his back,” he testified. In their emails, Maher and Michael spoke in code about the leaks, according to the government’s evidence, obviously recognizing that what they were doing was wrong.
After his sister became engaged to marry Maher in 2003, Salman became close to Michael. Michael began tipping Salman off to the information he had wheedled out of his brother Maher. Salman knew the tips came from Maher, and that Maher wasn’t supposed to leak them. Salman traded on that information. Even though Salman had his own trading account, he made these particular trades using someone else’s brokerage account—splitting the profits with that person—in an apparent effort to conceal the connection between himself and Maher.
He and his partner made $1.5 million from these trades, including more than $1 million from a single trade in 2007. On one occasion Salman gave Michael $10,000 as a thank-you, according to the government’s evidence.
A layperson listening to these facts can have only one reaction: WTF? Isn’t this what insider trading is all about? What in God’s name could Bassam Salman’s defense be? And why would the Supreme Court need to review a case like this?
The answer is that the original tipper, Maher Kara, didn’t get paid anything by Michael Kara for supplying him with the material nonpublic information that he traded on.
As for the bigger question—why would that fact possibly matter?—there are a couple lengthy answers, none of which are completely satisfying. I summarized some key ones a few months ago in a story entitled Why Insider Trading May Be Tougher Than Ever to Prosecute. In short, in the landmark 1983 Supreme Court case SEC v. Dirks, the Supreme Court held that—with certain important qualifications—if the tipper receives no “personal benefit” in exchange for a tip, he hasn’t committed fraud and thus can’t be guilty of insider trading.
Suffice it to say that these issues reached a head in December 2014, when the U.S. Court of Appeals for the Second Circuit in New York tossed out the convictions of two hedge fund managers, Todd Newman and Anthony Chiasson, in a broadly worded opinion that has subsequently posed major and, in my humble opinion, unwarranted obstacles for prosecutors in this area. Since the ruling, Manhattan U.S. Attorney Preet Bharara has had to drop at least 10 insider-trading cases—including several involving defendants who had already pled guilty—and still more convicted defendants are now seeking to reopen their cases.
When the Supreme Court took Salman’s case in January—against the wishes and recommendation of the Department of Justice, which apparently feared what the Court, as then constituted, would do with it—it looked quite ominous for the government. Justice Scalia has long had a number of beefs with the insider trading laws, and paring them back seemed in line with his predilections. Insider trading prosecutions triggered all three of Scalia’s big concerns:
- First of all, he believed that there’d been too much criminalization of business conduct.
- Second, he believed that there’d been too much federalization of the criminal law (an arena traditionally left to the states).
- Third, he’d long been wary of any sort of judge-made criminal law, which he feared created too great a risk of due process issues—i.e., defendants not being put on notice before they were charged of precisely what conduct was forbidden. (There is no specific insider-trading statute; judges have interpreted the general securities fraud statute to cover certain forms of insider trading.)
Salman’s attorney, Alexandra Shapiro, repeatedly threw these red-meat, Scalia-directed issues before the Court during Wednesday’s argument. But this time they fell flat on the floor, and no one picked them up.
Instead, Justice Stephen Breyer politely refuted them, without any of his brethren pushing back. “[The securities fraud law has] been around a long time,” he told Shapiro. “Exactly what’s criminal, what’s civil and so forth has been developed by courts over a long time. This statute’s been around since the ‘30s, and we have courts developing law in it. And I believe the marketplace pays a lot of attention to that. And virtually every court, I think, but [the U.S. Court of Appeals for the Second Circuit], has held that this does extend to a tipper giving inside information to a close relative. And it seems to me . . . that to take the minority [view] here [of] the Second Circuit . . . is really more likely to change the law that people have come to rely on then it is to keep it.”
Which is what one would have expected Justice Breyer to say. The striking difference this time was that Justice Scalia didn’t take up the cudgel, coming to Shapiro’s rescue, and supplying forceful new arguments even she hadn’t thought of. And neither did Chief Justice John Roberts, Jr., Justice Anthony Kennedy, Justice Clarence Thomas, or Justice Samuel Alito.
In sum, the oral argument showed that Justice Scalia’s passing has marked not just a new era for insider-trading jurisprudence, but a new era for the Court.