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.