The Supreme Court upheld a long-standing definition of insider trading Tuesday by unanimously rejecting a challenge to what kind of benefit the government has to prove when information is shared by friends or relatives.
The court had accepted a challenge to that precedent brought by Bassam Salman after convictions against hedge fund managers Todd Newman and Anthony Chiasson were overturned in December 2014 by the 2nd U.S. Circuit Court of Appeals in New York. The 2nd Circuit said prosecutors need to show a tangible benefit between the people giving and receiving information.
Mr. Salman was convicted of insider trading for receiving stock tips from a friend who had received inside information from Mr. Salman's brother-in-law, a Citigroup investment banker, and the appeals court upheld the conviction on July 6, 2015.
Justice Samuel A. Alito Jr. delivered the opinion, which held that the 9th U.S. Court of Appeals in San Francisco had properly applied the 1983 legal precedent set in Dirks vs. SEC in upholding Mr. Salman's conviction, and the jury was right to infer a benefit to the tipper. The Newman decision “is inconsistent with Dirks,” Mr. Alito said. “We reject Salman's argument that Dirks' gift-giving standard is unconstitutionally vague as applied to this case. Dirks created a simple and clear 'guiding principle' for determining tippee liability.”
In its amicus brief to the Supreme Court, the Securities Industry and Financial Markets Association argued that “that insider-trading liability should not turn solely on notions of friendship or family relationship alone,” and that financial institutions “need insider-trading rules that are clear and predictable.”