The U.S. Supreme Court appeared reluctant Wednesday to loosen the rules that have governed insider-trading prosecutions for more than 30 years, brushing aside the 2014 Newman appeals court decision that made it harder for the government to go after tippers and tippees.
The eight-member court heard hourlong arguments in Salman v. United States, a closely watched but convoluted case in which the defendant Bassam Salman was convicted for trading on information he received second-hand from the brother of his sister’s husband, even though the tipper himself did not make money from the interactions.
The pro-prosecution tenor of the questioning could dash the hopes of some high-profile financial wrongdoers like Rajat Gupta and Raj Rajaratnam who were banking on the Newman case to undo their convictions. In United States v. Newman, a panel of the U.S. Court of Appeals for the Second Circuit said the government needed to prove that the tipper reaped a personal benefit “of some consequence” in exchange for the leaked information.
“Obviously the integrity of the markets is a very important thing for this country,” Justice Elena Kagan said at one point on Wednesday. “And you’re asking us essentially to change the rules in a way that threatens that integrity.”
Kagan was addressing Salman’s lawyer, Alexandra Shapiro of Shapiro Arato in New York, who urged the court to “limit this crime to its core,” namely “the insider’s abuse of confidential corporate information for personal profit.” Shapiro invoked high court decisions as recent as last term’s McDonnell v. United States that have construed federal criminal statutes narrowly to avoid “serious separation of powers and vagueness problems.”
That was a trend that the late Justice Antonin Scalia often supported, but the current court seemed uninterested on Wednesday—at least when it came to insider training. Justices across the spectrum hit Shapiro with skeptical, if not hostile, questions. One of the skeptics was Justice Ruth Bader Ginsburg, for whom Shapiro clerked in 1993 and 1994.
The pivotal issue in the Salman case is whether and what kind of “personal benefit” for the tipper must be proven to successfully prosecute an insider-trading case. That element of the crime was articulated broadly in the 1983 Supreme Court decision Dirks v. Securities and Exchange Commission—a precedent whose future now seems secure.
Justice Stephen Breyer, like other justices, seemed content with a broad definition of “personal benefit” that would include a tipper helping a family member without necessarily pocketing any money himself or herself.
“When you use it to benefit a close family member, is that, in effect, benefitting yourself,” Breyer said. Then, for the second day in a row, Breyer made a pop culture reference when he cited a quote that “Cecil B. DeMille said, or maybe Jack Warner—the rule of relativity: never hire a relative. You could have that view, but you also have the view that helping a relative is helping yourself.” It was film executive Jack Warner who said it, by the way. (On Tuesday, Breyer mentioned Kim Kardashian during an oral argument.)
Justice Anthony Kennedy also chimed in, asserting that “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.”
Shapiro gamely defended her position, arguing more than once that if “personal benefit” is interpreted too broadly, a wide range of useful and common interactions would be jeopardized. “Analysts talk to company insiders all the time, and it’s essential to the free flow of information to the marketplace,” she said.
By the time U.S. Deputy Solicitor General Michael Dreeben rose to defend the government’s position, his main task was to erase doubts Shapiro may have seeded that the government will prosecute all manner of casual and innocent discussions.
Justice Samuel Alito Jr. offered up a hypothetical situation of a corporate insider walking down the street and encountering a stranger who “has a really unhappy look on his face.” To make his day, the insider gives the stranger some information and says “you can make some money if you trade on this.”
Dreeben said that would be a violation, but only because the insider was violating a duty of loyalty to his or her company. In several other exchanges, Dreeben emphasized that “the government would not seek to hold someone liable who was loose in their conversations but had no anticipation that there would be trading.” Dreeben also said the government has to show “a breach of fiduciary duty” as well as “an intent to defraud … and we’re going to have to show willfulness in order to obtain a criminal conviction.”
Justice Sonia Sotomayor, formerly a federal district court judge, expressed doubt, asserting that “there’s a legion of cases” in which insiders have been prosecuted without knowing that a trade would occur. Dreeben suggested the SEC may have done so in civil cases, but not in criminal cases. The justices seemed satisfied that there are enough safeguards in place to keep prosecutors from overreaching.