WASHINGTON -- The Supreme Court on Tuesday unanimously ruled in favor of prosecutors in a major insider trading case, saying that gifts of confidential information from business executives to relatives violate securities laws.
Federal appeals courts had disagreed about whether people making unauthorized disclosures of material and nonpublic information must receive a tangible benefit in return for their conduct to violate insider trading laws. Justice Samuel Alito Jr., writing for the court, said that giving a gift to a friend or relative, whether in the form of cash or in the form of a tip, benefited the insider.
The case, Salman v. United States, concerned trading by Bassam Salman based on information from his future brother-in-law, then a member of Citigroup's health care investment banking group. Prosecutors claimed that the brother-in-law, Maher Kara, passed information to his brother, Mounir Kara, known as Michael, who then passed the information to Salman.
The question was whether prosecutors had to prove that Maher Kara disclosed the information in exchange for a personal benefit.
The answer was easy, Alito wrote.
"Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother," Alito wrote. "It is obvious that Maher would personally benefit in that situation. But Maher effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it."
Salman had relied on a 2014 decision from the 2nd U.S. Circuit Court of Appeals, in Manhattan, United States v. Newman, that made it harder to prosecute insider trading cases. That decision had dealt a setback to Preet Bharara, the U.S. attorney in Manhattan, whose office oversaw a sweeping crackdown on insider trading in the $3 trillion hedge fund industry.
Bharara applauded the Supreme Court's decision.
"The court stood up for common sense and affirmed what we have been arguing from the outset -- that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public," he said in a statement. "Today's decision is a victory for fair markets and those who believe that the system should not be rigged."
In Salman's case, the 9th U.S. Circuit Court of Appeals, in San Francisco rejected the reasoning in the Newman case. The Supreme Court on Tuesday affirmed that decision.
Alito said the Supreme Court's 1983 decision in Dirks v. Securities and Exchange Commission answered the question before the justices. The decision in the Dirks case required evidence that the insider "directly or indirectly" gained something from the initial disclosure.
The 2nd Circuit had read the passage narrowly, saying it required "proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature."
But the 9th Circuit focused on a passage in the Dirks case that allowed liability "when an insider makes a gift of confidential information to a trading relative or a friend."
Alito sided with the broader decision.
"By disclosing confidential information as a gift to his brother with the expectation that he would trade on it," Alito wrote, "Maher breached his duty of trust and confidence to Citigroup and its clients -- a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed."
Alito rejected arguments from Salman's lawyers that the appellate court's approach was unconstitutionally vague.
"At most," Alito wrote, quoting a decision last year that struck down a federal law on vagueness grounds, "Salman shows that in some factual circumstances assessing liability for gift-giving will be difficult. That alone cannot render 'shapeless' a federal criminal prohibition, for even clear rules 'produce close cases.'"
"To the extent the Second Circuit held that the tipper must also receive something of a 'pecuniary or similarly valuable nature,' in exchange for a gift to family or friends," Alito said, "we agree with the Ninth Circuit that this requirement is inconsistent with Dirks."
Daniel C. Richman, a former federal prosecutor and Columbia Law School professor, said the Supreme Court took a minimalist approach in dealing with the case by resolving a dispute between two federal appellate courts. He said the court made clear that the framework it established down in the Dirks case was still valid.
Business on 12/07/2016