In a unanimous decision, the US Supreme Court justices ruled that prosecutors in insider trading cases don’t always have to demonstrate that something of value was exchanged to prove that the crime happened. The court’s ruling comes two years after another decision, in United States v. Newman, raised questions regarding what comprises insider-trading. That decision led to the dismissal of a number of insider trading cases.
This week, however, in Salman v. United States, the nation’s highest court gave the government back some of the power it lost in the earlier federal court case. The justices’ opinion upheld the prosecution of Bassam Salman, a man convicted of insider trading.
Salman admitted to trading on the information given to him by his brother-in-law Maher Kara, a Citigroup (C) investment banker. Prosecutors accused him of making $1.5M by trading on tips about biomedical company acquisitions involving Citigroup clients.
Salman, who was convicted by a jury—a decision, which the US Court of Appeals for the 9th Circuit later upheld, rejected the reasoning arrived at in the Newman ruling. He countered that since his brother-in-law was not paid for the tip, nor did he receive a personal benefit, Salman shouldn’t and couldn’t be prosecuted.
Maher Kara had given the insider tip to his brother Munir Kara, who also traded on the information. The latter then shared the information with Salman.
Supreme Court Justice Alito, who wrote the court’s unanimous opinion, observed that gifting a relative with trading information is tantamount to the tipper insider trading and having that then “followed by a gift of the proceeds.” He invoked a 1983 Supreme Court ruling in Dirks V. SEC about insider trading. Alito noted that according to that decision, a tipper breaches a fiduciary obligation when gifting confidential information to “a trading relative.”
The judge said Maher disclosing the information to Munir and letting him trade based on the disclosure “effectively” rendered it as if Maher had traded on the information himself and then gifted the proceeds to Munir.
Insider Trading Cases
This latest ruling could impact the outcome of insider cases that are still pending or have yet to be brought. For example, The Wall Street Journal noted, there is the SEC’s insider trading case against hedge fund manager Leon G. Cooperman. Prosecutors reportedly decided to wait to file a parallel criminal case pending the Supreme Court’s ruling on defining insider trading.
Cooperman and his Omega Advisors are accused of insider trading using material nonpublic information that a corporate executive gave him in confidence. The SEC accused Cooperman of making illicit profits through the purchase of securities in Atlas Pipeline Partners (APL) before the latter sold its Elk City, OK natural gas processing facility.
The Commission accused Cooperman and his firm of accumulating Atlanta Pipeline Partners Securities after explicitly agreeing not to use the material nonpublic information he was given to trade. When Atlas Pipeline Partners made the news of asset sale public, its stock price rose over 31%.
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Supreme Court ruling makes insider trading cases easier to prosecute, CNN, December 6, 2016
Supreme Court affirms broad reach of insider trading laws, LA Times, December 6, 2016