Supreme Court to weigh reach of insider
trading law
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[October 03, 2016]
By Nate Raymond
NEW YORK (Reuters) - The U.S. Supreme Court
is set to consider this week a closely watched insider trading case that
could limit the ability of prosecutors to pursue such charges against
hedge fund managers and other traders.
The eight justices, who open their 2016-17 term on Monday, will hear
arguments on Wednesday in the case of an Illinois man, Bassam Salman,
who prosecutors said made nearly $1.2 million trading on inside
information about mergers involving clients of Citigroup Inc<C.N>, where
his brother-in-law worked.
It is the first time in two decades that the Supreme Court has taken up
a case involving insider trading, a crime that the U.S. Congress has
never defined and has left the courts and the Securities and Exchange
Commission to shape.
Salman was convicted of conspiracy and securities fraud charges arising
from insider trading and sentenced in 2014 to three years in prison.
At issue in Salman's appeal is whether the government in insider trading
cases must prove that an alleged source of corporate secrets like the
brother-in-law received a tangible benefit like cash in exchange for any
tips.
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Lawyers and prosecutors say that requiring such proof would make it
harder for authorities to pursue insider trading cases, potentially
preventing prosecutions in which corporate executives tip friends or
relatives without any tangible quid pro quo.
"This will be a court decision that could have significant ramifications
on if tipping cases can continue to be brought with the fervor they have
been brought in the last decade," said David Miller, a defense lawyer at
the law firm Morgan, Lewis & Bockius.
The appeal follows ramped-up efforts by U.S. authorities to crack down
on insider trading, with the SEC announcing charges against more than
550 people in the past six years.
A wave of insider trading cases brought by Manhattan federal
prosecutors, meanwhile, resulted in Galleon Group founder Raj
Rajaratnam's conviction in 2011 and a $1.8 billion settlement and plea
deal in 2013 with hedge fund SAC Capital Advisors LP.
But in December 2014, a federal appeals court in New York dealt
prosecutors a major blow by overturning the conviction of two hedge fund
managers, Todd Newman and Anthony Chiasson, and narrowing authorities'
ability to pursue such cases.
The New York-based 2nd U.S. Circuit Court of Appeals held that to be
convicted, a trader must know that the source received a benefit in
exchange, and that such a benefit was "at least a potential gain of a
pecuniary or similarly valuable nature."
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The U.S. Supreme Court building facade is pictured in Washington
March 29, 2016. REUTERS/Gary Cameron/File Photo
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DROPPING CHARGES
The ruling forced prosecutors under Manhattan U.S. Attorney Preet
Bharara to drop charges against 12 other defendants, out of 107
people charged under his watch since 2009.
While the Supreme Court in October 2015 declined to review the case,
the justices in January agreed to review a similar one, Salman's
case, in which a federal appeals court in California had issued a
potentially conflicting ruling.
Salman argued that his trading was not illegal as no proof existed
that his brother-in-law, in tipping a family member who in turn
tipped Salman, received anything beneficial in exchange.
The San Francisco-based 9th U.S. Circuit Court of Appeals rejected
that argument, saying that requiring a tangible benefit in such a
circumstance would allow insiders to tip their relatives so long as
they got nothing in exchange.
Prosecutors are hoping the Supreme Court adopts the 9th Circuit's
view and rejects the 2nd Circuit's narrow interpretation, which
authorities said could result in some people avoiding charges and
could affect investigations.
For example, hedge fund investor Leon Cooperman, who the SEC sued
last month for insider trading, has said that federal prosecutors in
New Jersey have informed him that they are holding off on pursuing
criminal charges until the Supreme Court rules.
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Many defense lawyers say that what Wall Street is looking for is a
ruling clearly defining what conduct violates the law.
"I do think clarity is particularly important in this context, and
right now there is a lack of clarity," said Stephen Ascher, a lawyer
at Jenner & Block who backs a broad definition. "The Supreme Court
has the opportunity now to clean that up."
(Reporting by Nate Raymond in New York; Editing by Will Dunham)
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