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The Supreme Court Revisits Insider Trading The Supreme Court Revisits Insider Trading
(about 13 hours later)
Illegal insider trading goes on every day, and it is often difficult to detect and prosecute. But it is a fraud that harms public confidence in securities markets and unfairly disadvantages investors who are not privy to the confidential information. On Wednesday, the Supreme Court revisited this complex but important area of law for the first time in two decades.Illegal insider trading goes on every day, and it is often difficult to detect and prosecute. But it is a fraud that harms public confidence in securities markets and unfairly disadvantages investors who are not privy to the confidential information. On Wednesday, the Supreme Court revisited this complex but important area of law for the first time in two decades.
Federal law does not define insider trading — it bars only “manipulative” or “deceptive” conduct — but courts have said it is a crime for an insider (the tipper) intentionally or recklessly to share information that he or she has a duty to keep confidential, and receives a personal benefit, directly or indirectly, from giving the tip. In a 1983 case, Dirks v. S.E.C., the Supreme Court gave some examples of such a benefit, like money or a reputational benefit that will lead to future earnings. Federal law does not define insider trading — it bars only “manipulative” or “deceptive” conduct — but courts have said it is a crime for an insider (the tipper) intentionally or recklessly to share information that he or she has a duty to keep confidential, and to receive a personal benefit, directly or indirectly, from giving the tip. In a 1983 case, Dirks v. S.E.C., the Supreme Court gave some examples of such a benefit, like money or a reputational benefit that will lead to future earnings.
For the most part, the lower federal courts have applied that standard without trouble. But a recent disagreement over the meaning of “personal benefit” has brought the issue back to the justices.For the most part, the lower federal courts have applied that standard without trouble. But a recent disagreement over the meaning of “personal benefit” has brought the issue back to the justices.
The case now before the court is an appeal by Bassam Salman, a Chicago man who made hundreds of thousands of dollars after Michael Kara tipped him off to coming corporate mergers and acquisitions that were not yet public. Mr. Kara had gotten the tips from his brother, Maher, an investment banker at Citigroup and Mr. Salman’s future brother-in-law.The case now before the court is an appeal by Bassam Salman, a Chicago man who made hundreds of thousands of dollars after Michael Kara tipped him off to coming corporate mergers and acquisitions that were not yet public. Mr. Kara had gotten the tips from his brother, Maher, an investment banker at Citigroup and Mr. Salman’s future brother-in-law.
The men took steps to cover their tracks. In 2013, Mr. Salman was convicted of insider trading and sentenced to three years in prison.The men took steps to cover their tracks. In 2013, Mr. Salman was convicted of insider trading and sentenced to three years in prison.
Mr. Salman wants his conviction overturned because, he argues, Maher Kara did not receive any direct financial benefit from providing the tips. He relies on a 2014 decision by the United States Court of Appeals for the Second Circuit, which narrowly interpreted “personal benefit” to throw out the insider-trading convictions of two hedge-fund managers. In that case, the defendants had obtained their inside information through a chain of several people and were unaware of the original source, or whether that source had received anything for the tip.Mr. Salman wants his conviction overturned because, he argues, Maher Kara did not receive any direct financial benefit from providing the tips. He relies on a 2014 decision by the United States Court of Appeals for the Second Circuit, which narrowly interpreted “personal benefit” to throw out the insider-trading convictions of two hedge-fund managers. In that case, the defendants had obtained their inside information through a chain of several people and were unaware of the original source, or whether that source had received anything for the tip.
But in Mr. Salman’s case, as the Court of Appeals for the Ninth Circuit held, he knew exactly who was providing the tips that netted him so much money, and he knew the close nature of the Kara brothers’ relationship. During Mr. Salman’s trial, Maher Kara admitted that providing the tips to his brother would also “benefit me directly.”But in Mr. Salman’s case, as the Court of Appeals for the Ninth Circuit held, he knew exactly who was providing the tips that netted him so much money, and he knew the close nature of the Kara brothers’ relationship. During Mr. Salman’s trial, Maher Kara admitted that providing the tips to his brother would also “benefit me directly.”
If Mr. Salman’s conviction is overturned, any insider could freely disclose confidential information to relatives who could then trade on it, and so long as the insider didn’t ask for any money in return, no one would be liable. In the real world, of course, a personal benefit, particularly among relatives, can take many forms besides money. As Justice Stephen Breyer said during oral arguments on Wednesday, “To help a close family member is like helping yourself.”If Mr. Salman’s conviction is overturned, any insider could freely disclose confidential information to relatives who could then trade on it, and so long as the insider didn’t ask for any money in return, no one would be liable. In the real world, of course, a personal benefit, particularly among relatives, can take many forms besides money. As Justice Stephen Breyer said during oral arguments on Wednesday, “To help a close family member is like helping yourself.”
The Supreme Court has said that determining when an insider has personally benefited from leaking information “will not always be easy.” But absolving Mr. Salman would set a precedent that would make the fight to stop illegal insider trading even harder.The Supreme Court has said that determining when an insider has personally benefited from leaking information “will not always be easy.” But absolving Mr. Salman would set a precedent that would make the fight to stop illegal insider trading even harder.