The NASPP Blog

After nearly two decades of silence on insider trading matters, the Supreme Court ruled on a case this week (Salman v. United States) that has restored the government with some of the power in prosecuting insider trading that had been curtailed by lower court rulings over the past couple of years.

Getting Back to the Way it Was

Two years ago, government prosecutors – riding a successful wave of recent insider trading prosecutions – were stopped in their tracks when the Second U.S. Circuit Court of Appeals, in the case U.S. v. Newman, overturned two “key” insider trading convictions, dealing a blow to the Justice Department and the SEC. At the time, the Wall Street Journal summarized the situation as follows: “…a federal appeals court overturned two insider-trading convictions and ruled it isn’t always illegal to buy or sell stocks using inside information.” The ruling raised the bar for prosecutors on a crime that is already hard to prove, and ended up limiting the types of insider trading cases the government could pursue. I covered this in two prior blog posts: “The Supreme Court and Insider Trading” (August 6, 2015) and “Insider Trading Isn’t Illegal?” (April 2, 2015).

The aftermath of the Newman decision included confusion around what really constitutes insider trading. Federal prosecutors were forced to drop several high profile cases literally mid-stream. Ever since, it seems the government’s aggressive approach to prosecuting insider trading cases has somewhat waned – probably due in part to having their hands tied.

Fast forward to today, and the government has regained some, but not all, power in the quest to enforce consequences for insider trading. In a Wall Street Journal article on the topic, “The Supreme Court Hardens Stance on Insider Trading” (December 7, 2016), authors Aruna Viswanatha and Brent Kendall report that while the ruling appears to have avoided some of the issues around insider trading (such as tips to acquaintances), it has clarified the question of whether tipping a relative about inside information is considered insider trading when no benefit is received by the tipster.

“…the ruling gives prosecutors more ammunition to file charges even in cases where they can’t show that the tipster received something of value for passing the information.”

A significant part of the high court’s ruling is the justices’ conclusion that showing a tipster and trader to be related are all that is needed to bring an insider trading case.

In the WSJ article, Viswanatha and Kendall summarize the case that brought about the Supreme Court’s opinion as follows:

“The opinion Tuesday written by Justice Samuel Alito upheld the prosecution of a Chicago man convicted of trading on inside tips from a relative, with the justices concluding that proving a tipster and trader were related was enough to bring a case.

In that case, defendant Bassam Salman admitted he had traded on information obtained from his brother-in-law who worked as an investment banker at Citigroup Inc. Mr. Salman was convicted in 2013 and sentenced to three years in prison.

Prosecutors said Mr. Salman and an associate generated more than $1.5 million in profits by trading on tips about coming acquisitions of biomedical companies involving Citigroup clients. Mr. Salman had contended that because there was no compensation or other personal benefit exchanged for the tip, he couldn’t be prosecuted.

Part of Mr. Salman’s defense rested on the 2014 case, known as U.S. v. Newman, issued by a New York-based federal appeals court, which declared the government needed to show that the tipster received a benefit. The Supreme Court declined to consider an appeal.

In upholding Mr. Salman’s conviction, Justice Alito’s ruling narrowed a portion of the Newman case. “Giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds,” Justice Alito wrote.”

With this latest development in the legalities of insider trading, it’s time to review your insider trading policy language and further educate employees. Tipping shouldn’t be occurring in the first place, but over the years we’ve seen it happen. There have been several cases involving relatives (see The NASPP Blog “Husbands and Wives Insider Trading,” (April 4, 2013)), and it’s important for employees to know that even if they don’t intend to receive any benefit from passing along the tip to a relative, the action of doing so is considered insider trading.

-Jenn