Briefing Note: A “Case” for Insider Trading
On December 6, 2016, in a unanimous ruling delivered by Justice Alito, the Supreme Court ruled that it could very well be. The case of Salman v. United States affirmed the Ninth Circuit’s opinion, which had previously held that it was enough that the insider and the tippee shared a close family relationship and the benefit need not be tangible. The decision comes after hearing arguments on October 5, 2016, to reconcile conflicting opinions on the 1983 Supreme Court decision in Dirks v. SEC and the Second Circuit’s 2014 opinion in United States v. Newman.
An insider trading case had not been before the Court in nearly two decades. The issue before the Court was whether the personal benefit to the insider that is necessary to establish insider trading under Dirks requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” in the case of Newman. The Court’s 8–0 ruling that prosecutors need not prove that a tipper received cash or a tangible benefit in exchange for giving tips to family and friends sends a message to Wall Street insiders who may incidentally profit from confidential information.
What it Means for Prosecutors & Financial Professionals
While Wall Street will seemingly become less regulated under the new administration of President-elect Donald Trump, this decision actually makes it easier to prosecute insider-trading cases and rejects the standard set in Newman.
With Salman v. United States now decided, this is no longer the case. United States Attorney Preet Bharara, prosecutor for the Southern District of New York, praised the Supreme Court’s decision in a statement noting that it is “a victory for fair markets and those who believe that the system should not be rigged.” Justice Kagan also suggested during the oral arguments that this case was for the “sake of the integrity of the markets.” The decision demonstrates that those who profit from confidential information should be held accountable. However, similar litigation will still be very fact-intensive, as many have argued that the law as it stands is too vague.
If the goal is to curb corruption and limit the lucrative business of trading on inside information, which isn’t entirely unlawful, perhaps the courts should push it back to Congress to set the standard.
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