Supreme Court Sounds Likely to Help Insider-Trading Prosecutions

October 5, 2016, 9:44 PM UTC
Supreme Court
Photpgraph by Ryan McGinnis — Getty Images

On Wednesday morning, the shorthanded, eight-justice U.S. Supreme Court seemed surprisingly likely to reach consensus on what had seemed like a potentially controversial insider-trading case—the marquee business case on its docket at this juncture.

The case, which the Court decided to review last January—a month before Justice Antonin Scalia died suddenly—is that of Bassam Salman, a wholesale grocer who made more than $1.5 million trading on information that was clandestinely leaked by his brother-in-law Maher Kara to another brother-in-law, Michael Kara, and then passed along to him.

What made the case difficult is that the brother-in-law who first leaked the information, Maher, an investment banker in Citigroup’s healthcare unit, received no obvious benefit—neither cash nor property, for instance—in exchange for leaking the information to his brother, Michael. Maher testified, rather, that his beloved brother had pestered him until Maher gave him the information to get him “off his back.” Michael then shared the information with Salman, with whom he’d become close, after Salman’s sister married Maher.

When an insider (“the tipper”) gives material inside information to another person (“the tippee”) in exchange for nothing obvious in return, and the tippee then trades on the information, the law is currently unclear about whether that’s a crime for either the tipper or tippee.

Yet despite the potential for controversy, at least five justices seemed inclined to affirm Salman’s conviction Wednesday morning, judging from a transcript of the oral argument. The justices leaning toward affirmance appeared to include Anthony Kennedy and the four liberal-leaning justices: Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan.

Justice Kagan suggested that accepting Salman’s challenge to his conviction would require upending a 1983 Supreme Court precedent, something the justices are loath to do.

“You’re asking us to cut back significantly from something that we said several decades ago—something Congress has shown no indication that it’s unhappy with,” she told Salman’s attorney, Alexandra Shapiro. “And you’re asking us essentially to change the rules in a way that threatens that integrity [of the nation’s markets].”

Justice Samuel Alito was the most skeptical questioner of the government’s attorney, Deputy Solicitor General Michael Dreeben, but even he did not seem resolutely opposed to affirmance. Justice Clarence Thomas did not ask any questions.

The ambiguities in Salman’s case stem from a 1983 U.S. Supreme Court decision involving strange and rarely duplicated facts. In that case, the former officer of an insurance company tipped off a stock broker, Raymond Dirks, to the fact that the insurance company was rife with fraud. Dirks then sold his shares of the insurance company, and advised clients to do so, too. Since the tipper had received nothing in exchange for leaking the information—indeed, he seemed to be altruistically trying to blow the whistle on the wrongdoing—the court held that neither he nor Dirks had acted illegally.

At the same time, however, the Dirks Court did say that when an insider “makes a gift of confidential information to a trading relative or friend,” that would still be illegal, because the tipper would be receiving sufficient personal benefit, even though it was intangible.

A dark pall was recently cast over this second portion of Dirks, however—the part that suggested that a gift to a relative or friend did bring personal benefit to the tipper—by the December 2014 ruling of the U.S. Court of Appeals for the Second Circuit, in New York. In that case, Circuit Judge Barrington Parker, writing for a unanimous panel, tossed out the insider-trading convictions of hedge fund managers Todd Newman and Anthony Chiasson. finding that prosecutors had failed to prove that the original tippers in their cases had received any “personal benefit.” Parker then interpreted the “gift” language from Dirks so narrowly as to all but define it out of existence.

The ruling shocked Manhattan U.S. Attorney Preet Bharara, who had brought a wave of insider-trading prosecutions since assuming office in August 2009. He has charged 111 people with that offense to date, but since Newman he has had to dismiss at last 10 of those cases—including several for which he had already obtained guilty pleas.

In upholding Salman’s conviction in July 2015, the Ninth Circuit Court of Appeals in San Francisco rejected the Second Circuit’s narrow interpretation of “gift,” creating an apparent circuit split.

When the Supreme Court declined to review the Newman case, but then agreed to hear Salman, some people assumed Salman’s conviction would be overturned.

But the questioning at today’s argument suggested the opposite.

“To help a close family member is like helping yourself,” Justice Breyer said during the questioning, explaining why he thought that giving a gift to a relative conferred a personal benefit on oneself.

Dirks says there’s a benefit in making a gift,” said Justice Kennedy, while questioning Salman’s attorney, Shapiro. “As Justice Breyer points out, you certainly benefit from giving to your family. It ennobles you and, in a sense it helps you financially because you make them more secure.”

At least four other justices appeared to agree.

In an earlier version of this article I mistakenly identified a quotation of Justice Elena Kagan as having been spoken by Chief Justice John Roberts, Jr. In light of that change, I also changed the number of justices that I count as leaning toward affirmance, based on their questions. I regret the error.

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