The U.S. Supreme Court on Wednesday began weighing what has become one of the most troubling questions on Wall Street: When does sharing confidential corporate information with a family member become a crime?
Insider trading has been long been the epitome of Wall Street wrongdoing, but prosecutors and defense attorneys have been arguing for years over how it is defined and when someone should face prison for it.
In this case, Salman v. United States, the court is considering what motivated Maher Kara, a former investment banker at Citigroup, to give confidential information about health-care industry mergers to his older brother, Michael. Michael bought and sold stock based on the tips and then passed the information to his brother-in-law, Bassam Salman.
Salman made a profit of more than $1 million by trading on the confidential information before being prosecuted for securities fraud. He was convicted in 2013 and sentenced to three years in prison. (Maher and Michael Kara both pleaded guilty to securities fraud in 2011 and cooperated with the government.)
Salman appealed, arguing in part that Maher Kara had not received money, gifts or any other reward in exchange for the tips. In the argument Wednesday, Salman’s attorney told the justices that other courts have ruled insider trading occurs only when the provider of confidential information gets some kind of tangible benefit.
“I think the evidence [shows that at most, Maher Kara] . . . got the scant benefit of getting his brother off his back,” said Alexandra Shapiro, the attorney for Salman. “That was not a willing transfer of inside information.”
Prosecutors have rejected that argument, saying that defining insider trading so narrowly would leave Wall Street insiders free to divulge corporate information unavailable to average investors.
“A corporate insider possessing very valuable nonpublic material information could parcel it out to favored friends, family members and acquaintances who could all use it in trading without the knowledge of the public or the investors on the other side of the trade. This would be deleterious to the integrity of the securities markets. It would injure investor confidence,” Michael Dreeben, the deputy solicitor general for the Justice Department, told the court.
It was unclear during the hour-long oral arguments how the justices were leaning on the issue, but legal experts have said it is significant that the case reached them at all. The Supreme Court hasn’t heard an insider trading case in more than 20 years, and the outcome of this one could define an important aspect of the law, changing the landscape for such prosecutions for decades to come.
“Obviously the integrity of the markets are a very important thing for this country. And you’re asking us essentially to change the rules in a way that threatens that integrity,” Justice Elena Kagan said while challenging the defense’s argument.
A key issue raised by the justices was whether money needed to be involved for someone to benefit from giving a gift of confidential information to a relative.
It could be argued, said Justice Stephen G. Breyer, that “to help a close family member is like helping yourself. That’s not true of all families . . . but many, it is.”
Justice Anthony M. Kennedy said, “It ennobles you, and in a sense it — it helps you financially because you make them more secure.”
The case comes at a time when prosecutors’ ability to pursue insider trading cases has already been curtailed.
Insider trading prosecutions took an aggressive turn in 2008 after the New York field office of the FBI began to suspect that a surge in profits at Wall Street hedge funds could be the result of endemic insider trading. Using techniques honed on the mob, the FBI began using wiretaps to gain insight into the notoriously secretive hedge fund world.
But in 2014, the U.S. Court of Appeals for the 2nd Circuit narrowed what could be considered insider trading. Simply receiving inside information about a company is not enough, the court ruled. Prosecutors had to show that the person providing the information received something tangible — like money — in return.
After a more than eight-year crackdown on Wall Street cheating, U.S. attorney Preet Bharara was forced to toss more than a dozen insider trading convictions over the past year. The ruling, he said, created “an obvious road map for unscrupulous investors.”