Supreme Court Just Made It Easier To Go After Insider Trading

The Four Courts building in Dublin, Ireland along the River LIffey.

Preet Bharara, the U.S. Attorney for the Southern District of New York could be the happiest prosecutor in the country right now, after the Supreme Court’s decision regarding insider trading prosecutions. That unanimous ruling just made it much easier for federal prosecutors to go after those who make a profit—at the expense of other investors—through trading on material, non-public corporate secrets.

Insider Trading Rules Change in 2014

In 2014, Bharara’s near-perfect record of prosecuting insider trading took a hit when rules for prosecuting the crime were tightened up. A tipster was required to receive a valuable benefit for disclosing non-public corporate confidences before the benefactor could be prosecuted. Because of these new rules, several of the high-profile insider trading cases being prosecuted by Bharara fell apart, allowing Wall Street to breathe easier—at least for a while.

No Profit is Necessary for Insiders Before People They Tip Can Be Prosecuted

Bharara may now have reason to be happy once more—Justice Samuel Alito said it was not necessary for insiders to profit before the people they tip off can be “on the hook.” Alito claimed that making a “gift” of inside information to a relative is no different from trading on the information, obtaining a profit, and doling them out to the relative who is doing the trading—the “tipper” benefits either way.

Praise for the Supreme Court

Bharara praised the Supreme Court ruling echoing the sentiments of the court that it was a more commonsense approach and affirming that the law prohibits insiders from providing an advantage to a friend or relative when that advantage comes at the expense of the trading public. Since the Trump administration appears to be deregulating Wall Street at a dizzying pace, it could now be interesting to see how Bharara will wield these new laws.

The Case of Bassam Salman

To simplify what the Supreme Court has done, consider the case of Bassam Salman, whose attorneys argued he should not—and could not—be prosecuted because the person who provided Salman with the original tip did not benefit from that information financially. In this instance, the Supreme Court upheld Salman’s conviction. In this particular case, an investment banker for Citigroup, Maher Kara, discussed certain aspects of his job with his brother, Michael, who then shared that information with Bassam Salman. Salman’s indictment of conspiracy to commit securities fraud was upheld, while Maher and his brother both pled guilty, testifying at Salman’s trial.

Supreme Court Refuses to Hear Newman, Weighing in on Salman

Three months before, the Supreme Court said “no” to the appeal by the government, however they did decide to revisit the laws concerning insider trading. Another case, United States v. Newman, also involved the “tippees” obligation in insider trading—as in, when is the person receiving confidential insider information forbidden from using that information in trades? While the Supreme Court refused to hear the Newman appeal, they did weigh in on Salman—and in a way that delighted Preet Bharara.

What Does Insider Trading Consist Of?

When a buy or sell of securities is predicated on “material, non-public” information, violating confidences or fiduciary duty, insider trading has occurred. However, conducting trades based on insider information is not a crime; a legal duty must be breached in connection with the trade for a crime to occur. Typically, an officer in a corporation trades company stock based on corporate information to which shareholders are not privy, “classic” insider trading has occurred.

In this situation, the corporate office has not acted in a manner that benefits the shareholders, misappropriating corporate information for private benefit. The prohibition on insider trading is more than just a ban on those who work for the company. Should an insider be allowed to provide this confidential information to friends or family members who owed no such duty to shareholders, then the ban on insider trading would be pointless, therefore those receiving confidential information as just as prohibited from benefiting from that information by trading.

Decades Since the Supreme Court Weighed in on Insider Trading

The last time the Supreme Court weighed in on insider trading was in the 1983 case of Dirks v. SEC. Raymond Dirks was a broker who obtained information from an Equity Funding officer, Ronald Secrist. Secrist made the claim that Equity Funding had massive fraud taking place within its walls, urging Dirks to scrutinize the situation. While Dirks did spend a short amount of time investigating, he also advised investors and clients regarding his findings, causing many to dump their shares. Stock prices plummeted, Equity Funding collapsed, and the SEC began to investigate the issue.

Dirks was charged with an SEC trading violation under the theory that because he received confidential information from Secrist, he was not allowed, legally, to share that information. The Supreme Court did not agree with the SEC’s position, claiming the establishment of insider trading does not rest solely on a person trading on non-public information, rather there must be manipulation or deception included—a violation of a legal duty in connection with the use of the information. In other words, the Supreme Court claimed that not every disclosure of confidential information has a sinister purpose.

When Insider Trading Can Occur

Insider trading may typically happen on Wall Street but can also happen in many other financial industries and sectors. Even a first-time offender can face an extremely severe sentence if convicted. Trading is meant to be on a level playing field for all those involved, giving the public the same information as everyone else. When one person is aware of “secret” information and makes a trade based on that information, then insider trading may be charged if the information comes to light. Having an unfair advantage damages all the legitimate stockholders, not to mention unfairly manipulating the market.

The SEC takes insider trading charges extremely seriously and will determine whether there was a misappropriation of private information based on the position the person holds. The laws regarding insider trading are complex and there may be multiple investigating agencies, causing such cases to typically be long and drawn out. If you have been accused of insider trading, it can be extremely beneficial to have a Mississippi lawyer by your side who has a deep understanding of the nature of insider trading cases.

Contact Our Jackson White Collar Criminal Defense Lawyers

If you are arrested and charged with a white-collar crime in Jackson, Hattiesburg, Meridian, or anywhere in the State of Mississippi, you need to fight for your rights and protect your freedom. The best way to do this is to hire an experienced Jackson white-collar criminal defense attorney immediately.

At Coxwell & Associates, PLLC, our attorneys believe in fighting aggressively for our clients and we can build a defense that is designed to expose the holes in the prosecution’s case against you. Contact Coxwell & Associates today at (601) 265-7766, or click on the button below.

Disclaimer: This blog is intended for general information purposes only, and is not a substitute for legal advice. Anyone with a legal problem should consult a lawyer immediately.

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