It’s the 1980s all over again –
shoulder pads, synthesizers, bomber jackets and insider trading. But in 2016,
the defendant in the biggest insider trading case of the year isn’t a
high-profile Wall Street denizen like Ivan Boesky or “junk bond king” Michael Milken: The main character in this story is a Chicago
grocery wholesaler named Bassam Salman.
Even if Salman’s case lacks the glitz
of other insider trading cases, though, both sides agree that the legal stakes
in his case are high. Salman and his attorneys contend that, if his conviction
for trading on third-hand information passed to him by an insider’s relative is
allowed to stand, the federal government will essentially have free rein to
prosecute whenever an insider passes on information to a friend or relative.
The federal government counters that a ruling for Salman could exacerbate
existing inequities in the stock market by making corporate insiders even more
likely to pass on confidential information to friends and family. And lurking
in the background is the broader issue, about which the justices have
previously expressed concern, of overcriminalization – whether the federal
criminal laws are being used to target conduct that Congress did not intend to
make a crime.
In 2005, Salman’s sister married Maher Kara, an
investment banker at Citigroup. Maher worked primarily in New York, while his
older brother, Michael, ran a hazardous waste business in Chicago. Over a
period of several years, Maher gave Michael confidential information that he
obtained through his job at Citigroup; Michael then both traded on the
information and passed on tips to Salman, who used the information to buy stock
in several companies.
The information proved lucrative, netting Salman hundreds
of thousands of dollars. But the trades also caught the attention of the
federal government, which charged Salman with insider trading. He was convicted
and sentenced to three years in prison.
In 1983, the Supreme
Court ruled in an insider
trading case involving a “tippee” – someone who receives confidential
information from an insider and then uses the information to trade. The court
explained that tippees are not always liable for violating insider trading
laws. Rather, tippee trading is banned when the insider violates his duty to
shareholders by disclosing the information. And that in turn, the court
reasoned, depends on whether the insider receives “a direct or indirect
personal benefit from the disclosure.”
The issue before the
court in Salman’s case is what constitutes the kind of “personal benefit” for
Maher, the insider who passed on the information, that would subject Salman, as
the “tippee,” to liability under the insider trading laws. Salman argues for a
bright-line rule: A “personal benefit” is limited to a financial gain for the
insider. Under this rule, Salman continues, he could not be convicted of
insider trading, because he got his inside information from Michael, who didn’t
pay Maher or give him anything else in exchange. Moreover, Maher gave the
information to Michael only after Michael promised that he wouldn’t use it to
trade on the stock market and wouldn’t provide it to anyone else; Maher’s only
motive, Salman suggests, “was to get a bullying brother off his back.”
In the federal
government’s view, although a “personal benefit” does include a pecuniary gain,
it can also extend to “a gift of confidential information to a trading relative
or friend.” The relevant question, for the government, is whether the
disclosure of information serves a corporate or personal purpose: If it serves
a personal purpose, then that is all that matters, and the government does not
have to show that the insider benefited financially from the disclosure. Such a
rule makes sense, the government maintains, because there is no real difference
between an insider trading on information and giving the proceeds to someone
else and giving inside information to someone else so that the recipient can
trade on it.
The government goes on to point out that its rule also recognizes
that an insider can gain significant non-financial benefits from passing on
confidential information – for example, the information could be used to help
an aging parent, reward a household employee, or simply impress the tippee.
By
contrast, the government argues, Salman’s proposed rule would make insiders
more likely to pass on inside information – “especially if they could secure in
return a non-pecuniary benefit, such as romantic favors from a mistress or a
college-admissions preference for their children.”
Salman also argues that
a rule requiring a financial gain for the insider would address two
constitutional concerns. The first of these involves the proper division of
responsibility between Congress and the courts. Salman maintains that because
it is the legislature’s job, rather than that of the courts, to define a crime
and prescribe a punishment, courts should interpret criminal laws narrowly.
That is particularly true here, he points out, when Section 10(b) of the
Securities Exchange Act, the statute used to combat insider trading, does not
say anything at all about insider trading: It bars “only ‘manipulative’ and
‘deceptive’ conduct in connection with the purchase or sale of securities,”
and, Salman adds, “there is nothing inherently manipulative or deceptive about
insider trading.”
The federal government
counters that the bar on insider trading rests squarely within the text of
Section 10(b). Insider trading, the government explains, “most certainly does
involve deception—it involves the failure to tell a party to whom the tipper or
trader owes a fiduciary or similar duty that confidential information … is
being taken for personal use.” And Congress has implicitly endorsed the use of
Section 10(b) to fight insider trading: Since the Court’s 1983 ruling on
insider trading, the government observes, “Congress has twice amended Section
10(b) without modifying the Court’s standard.”
Raising a second
constitutional concern, Salman suggests that the government’s rule is so vague
that it could easily violate the Constitution’s guarantee of due process,
because it doesn’t provide enough notice about what kind of conduct will
subject insiders and tippees to liability. Even “the satisfaction derived from
giving a gift” could qualify as a “personal benefit” under the government’s
theory, he argues. And in this case, he notes, Maher hardly gained satisfaction
from his disclosures; instead, they caused him “anxiety.”
The federal government
concedes that Section 10(b) is “unquestionably broad,” but it insists that it
is “intentionally so – to capture all kinds of fraud.” And there is no
ambiguity, it maintains, about what the insider trading law does or does not
permit: Courts and individuals can easily figure out whether inside information
was disclosed for a corporate purpose or a personal one – which is exactly why
the court drew that line in 1983. Indeed, the government adds, in this case
Maher – the insider – “harbored no doubt that his” disclosure of inside
information to his brother violated the law and also knew that Michael was
using the inside information to trade.
The government downplays Salman’s
concern that a government win in this case will give prosecutors “boundless
discretion to prosecute the exchange of inside information,” extending
liability to the insider’s “mere casual acquaintances” and even to tippees who
don’t actually know the insider and may not be aware of the insider’s motives.
It emphasizes that in insider trading cases the government must also prove that
the defendant acted “willfully.” In this case, for example, the prosecution
would have had to prove that Salman knew – which, the government contends, he
did – that Maher violated his duty to shareholders “by disclosing material,
nonpublic information for a personal benefit—a significant limitation on tippee
liability.”
The federal government
has a somewhat unlikely ally in the case: the activist group Occupy the SEC. In
a “friend of the court” brief, the group emphasizes that, in recent decades, “a
quarter of mergers and acquisitions have suffered from insider trading.” This
matters, the group adds, because almost half of the increase in a stock’s value
as a result of a planned merger or takeover happens before the merger or
acquisition becomes public knowledge – further evidence that “the securities
markets are rigged in favor of the well-connected and the influential.” A ruling
against the government in this case, the group concludes, “could handcuff the
government in its ability to root out such market inequities.”
Salman also has an
unusual source of support in Mark Cuban, the billionaire owner of the Dallas
Mavericks. Cuban explains that he was indicted on insider trading charges and
spent millions defending himself, only to be found not guilty “after only four
hours of deliberations” by jurors. He cautions that most people will lack the
resources to fight insider trading charges on such a large scale and will
instead have to decide “whether to succumb to a settlement despite not
believing that the conduct violated the law.” And he pushes back against the
suggestion that insider trading exacerbates inequities in the stock market,
observing that some scholars “have gone so far as to assert that a ban on
insider trading actually has a detrimental effect on the market.”
Salman’s case is one of
the five cases on the Supreme Court’s docket for the October Term 2016 that
were granted in January, before the death of Justice Antonin Scalia. As I
explained in an earlier post, three of those cases have not yet been scheduled for
oral argument, possibly because the justices are hoping that a ninth justice
will join the court and prevent a 4-4 tie, which would leave the decision below
intact. The fact that Salman’s case has been scheduled for oral argument at
least suggests that the justices do not necessarily view this case as a close
one, but we will know more after the court hears oral arguments on October 3. A
decision in the case is likely next year.
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