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Supreme Court Clears Up Rules for Insider-Trading Prosecutions

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In a win for federal prosecutors, the U.S. Supreme Court on Tuesday embraced a broad interpretation of insider-trading rules that will allow the government to pursue cases even when it cannot be shown that the insider was trying to benefit from giving the tip.  

Justice Samuel Alito Jr., himself a former U.S. attorney in New Jersey, wrote for a unanimous court, upholding a decision by the U.S. Court of Appeals for the Ninth Circuit in the case of Chicago businessman Bassam Salman. He 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 jury could infer that the tipper here personally benefited from making a gift of confidential information to a trading relative,” Alito wrote. “In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” The fact that the tipper, who worked for Citigroup, breached his fiduciary duty to the company by disclosing the tip, was key.

The ruling Tuesday sweeps aside the 2014 United States v. Newman ruling by the U.S. Court of Appeals for the Second Circuit that had made it harder for the government to go after tippers and tippees.

“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, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.” That is a reference to the last insider-trading ruling by the court, Dirks v. Securities and Exchange Commission, decided in 1983.

The decision could dash the hopes of high-profile financial wrongdoers who were banking on the Newman case to undo their convictions.  

New York U.S. Attorney Preet Bharara swiftly applauded the high 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. Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”

The ruling was foreshadowed by pro-prosecution comments by justices during oral argument in October. “Obviously the integrity of the markets is a very important thing for this country,” Justice Elena Kagan said to Salman’s lawyer, Alexandra Shapiro of Shapiro Arato in New York. “And you’re asking us essentially to change the rules in a way that threatens that integrity.”