The Supreme Court heard oral arguments yesterday in the insider stock trading case of former Wall Street Journal reporter R. Foster Winans, which could have significant implications for government securities fraud investigators and journalists.
In the packed courtroom, the Supreme Court justices aggressively challenged both attorney Don D. Buchwald, who represented Winans, and Solicitor General Charles Fried, who represented the government.
After Fried argued that Winans was guilty because he had violated a duty of loyalty to The Wall Street Journal, Chief Justice William H. Rehnquist said that if Congress had passed a law saying that anyone who breaches a duty to his employer is guilty of a crime, "the case would give one little trouble. But that is not the case."
Justice Antonin Scalia said the case raised troubling questions about the appropriate place to "draw the line" in criminal cases that involve leaking of confidential information learned on the job.
Winans' attorney Buchwald said the reporter's trading on advance information about upcoming columns was not illegal and was no different than Salomon Brothers trading in advance of an important speech by its influential economist, Henry Kaufman, whose words sometimes move markets.
Scalia challenged Buchwald on other points after Buchwald argued that securities fraud can only be committed against investors, not against a newspaper's reputation. "A private wrong endangering a party's reputation is not what the securities laws are about," Buchwald said. But Scalia said investors who bought stocks after reading The Wall Street Journal's "Heard on the Street" columns written by Winans were deprived of some financial gain because Winans had traded in advance of publication. "You could reasonably conclude there was injury to market participants," concurred Justice John P. Stevens.
Winans was sentenced in 1985 to 18 months in prison for his role in the trading scheme, which involved leaking information about the timing and substance of upcoming Journal "Heard on the Street" columns in 1983 and 1984. The influential column's impact on stock prices enabled Winans, two stockbrokers at Kidder, Peabody & Co. and others to make nearly $700,000 in trading profits by buying shares in advance of publication and selling soon after the columns appeared.
Although Winans' conviction was upheld on appeal last year, lawyers at the Justice Department and Securities and Exchange Commission are among those who have said privately they expect the Supreme Court to overturn some aspects of the case.
The stakes in the Winans case are high because of its potential impact on the "misappropriation theory," a legal approach that has been used by the SEC to bring many insider trading cases. While Congress has never defined illegal insider trading, the SEC has successfully brought cases under the theory that individuals who misappropriate or steal confidential information violate securities laws if they use that information to make trading profits.
In the past, the SEC has applied the misappropriation theory to cases involving corporate officers, investment bankers and lawyers directly involved in arranging takeovers, and also applied it to others who were tipped by these insiders. The difference in the Winans case is that he is a journalist whose trading was based not on stolen inside information, but on information he gathered as a newspaper reporter. If the Supreme Court's ruling in this case limits the reach of the misappropriation theory, it will diminish the SEC's ability to bring certain kinds of insider trading cases unless Congress acts to define the crime broadly.
For journalists, the case is significant because it could affect decisions to publish or withhold information that may affect stock prices. While criticizing Winans for his breach of journalistic ethics, The Reporters Committee for Freedom of the Press submitted a brief to the Supreme Court in favor of Winans, arguing that the case is an attempt to make violations of The Wall Street Journal's internal code of ethics into federal crimes. A ruling in the case is expected by the spring of 1988.