The Supreme Court, giving the government an important but incomplete victory in its war on insider trading, yesterday upheld the convictions of former Wall Street Journal reporter R. Foster Winans and two associates in a scheme to profit on advance information from the newspaper's daily stock tips column.
The eight-member court voted unanimously to uphold the convictions under the federal mail and wire fraud laws, finding that the insider-trading scheme defrauded the Journal of a "property" right to keep the contents of the columns confidential before publication.
However, the justices divided 4 to 4 over whether the conduct of Winans and the others violated the federal securities laws. The split leaves intact the ruling of the 2nd U.S. Circuit Court of Appeals that the men committed securities fraud by illegally "misappropriating" information that belonged to the newspaper, but is not binding precedent outside the circuit.
Winans, one of two writers of the Journal's Heard on the Street column, entered into an arrangement with two brokers at Kidder Peabody to pass them advance information about the timing and contents of the column in return for a share in the profits made by trading on the leaks. Over a four-month period, the brokers made about $690,000 by trading on advance knowledge of the contents of 27 columns.
In the convictions upheld yesterday, Winans and Kenneth P. Felis, one of the Kidder Peabody brokers, were found guilty of conspiracy, securities fraud and mail and wire fraud. Winans' roommate, David Carpenter, was found guilty of aiding and abetting the insider trading scheme. Winans was sentenced to 18 months in prison, Felis to six months, and Carpenter received probation.
The case was seen as a controversial extension of prohibitions against insider trading because, unlike the typical insider-trading scheme, Winans did not have "inside" information about the company whose stock was being traded and had no duty to be loyal to that company. Press groups also argued that the case infringed on First Amendment freedoms by permitting the government to regulate reporters' ethical obligations to their employers.
"We have little trouble in holding that the conspiracy here to trade on the Journal's confidential information is not outside the reach of the mail and wire fraud statutes . . . ," Justice Byron R. White wrote. His nine-page opinion did not explain the disagreement among the justices on the securities fraud issue or indicate how the justices voted.
Solicitor General Charles Fried, who argued the case for the government, said he was "very gratified" by the ruling, noting, "a lot of people were predicting we'd lose that very badly" after a Supreme Court ruling last term that narrowly interpreted the reach of the mail fraud statute.
Don D. Buchwald, who argued the case on behalf of the three men, said he was disappointed in the outcome. "Our position was never that the conduct was proper," he said. "Our position was that present statutes did not cover it . . . . "
In his opinion, White distinguished the Winans case from the high court's ruling last June in McNally v. U.S. In that case, the court said the mail fraud law cannot be used to punish public officials who deprive citizens of their intangible rights to honest government. Yesterday, in Carpenter v. U.S., White said Winans' scheme was punishable under the law because it involved a property right, the Journal's "intangible" right to keep its information confidential.
Securities law experts agreed yesterday that federal prosecutors will generally be able to attack insider trading through the mail and wire fraud law even if the Supreme Court eventually rejects the use of the "misappropriation" theory under the securities law.
"The bottom line on it is that most, but not all, of the situations where the government would have previously proceeded on a misappropriation theory under the securities law, the court has now said are prosecutable under the mail and wire fraud statutes," Buchwald said.
However, Buchwald and other experts stressed the importance of the unresolved question of whether "misappropriating" confidential information violates the federal securities laws. This is because the Securities and Exchange Commission, the primary enforcers of the prohibitions against insider trading, does not have power to bring cases under the mail fraud statute and would be hampered in its ability to seek injunctions and bring civil cases if the Supreme Court ultimately rejects the misappropriation theory.
The misappropriation theory has been used recently to go after various traders who are not considered "insiders," including investment bankers and corporate lawyers.
"There is obviously continuing uncertainty. The other shoe has yet to drop," said John C. Coffee Jr., a securities law expert at Columbia University. "Although this case resolves that it is a criminal offense, securities law doesn't chiefly get enforced by criminal penalties. It gets enforced by SEC proceedings and SEC injunctive actions," as well as through private lawsuits.
With the law still in an "unstable" state, Coffee said, "We don't know whether all the investors suing Ivan Boesky might have an action or not."
Boesky, once the most influential stock speculator on Wall Street, agreed to plead guilty to one criminal count and pay the government $100 million to settle civil charges that he traded stocks illegally on the basis of confidential information about upcoming takeovers.
In other action, the court, over the protests of seven chemical companies, let stand an order unsealing numerous documents about Agent Orange, the herbicide suspected of causing cancer among Vietnam veterans. The lawsuit led to a $180 million settlement.
The court also refused to review a Florida case involving two newspapers that held that the public has no right to attend or examine pretrail statements given in criminal cases under oath but not in a courtroom.