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The US Supreme Court is about to hear a major insider-trading case that could settle a long-standing Wall Street legal stand-off.
The case is Salman v. United States, and the court is set to hear it Wednesday.
Bassam Salman was convicted of trading on confidential information that came to him from an extended family member who had a brother who worked at Citigroup. Salman never paid the family member for the tips, and at issue is whether his actions met the definition of insider trading. The government says they do because Salman knew where the information came from and the three people involved benefited from a close family relationship.
“As a matter of finally clarifying a very murky area of the law, it’s going to have a huge impact,” said Brad Bondi, a partner at the law firm Cahill Gordon & Reindel. “What is meant by ‘personal benefit’? Do you have to have something of value, or is it enough that you just have a close relationship? And if it’s enough to just have a close relationship, what does that relationship resemble?”
It is the first time in two decades that the Supreme Court has taken up a case involving insider trading, a crime that Congress has never defined, leaving the courts and the Securities and Exchange Commission to shape.
Salman was convicted of conspiracy and securities-fraud charges arising from insider trading and sentenced in 2014 to three years in prison.
The court is expected to decide the case in the next year, potentially as early as January, said Derek Cohen, a partner at the law firm Goodwin Procter.
There are a few potential outcomes, Cohen added. The court may decide that the tipper has to receive some kind of financial benefit, or it could adopt a broader standard in which prosecutors wouldn’t have to prove an expectation of money but just a personal benefit. Another option, he said, could be that the court adopts components of each.
The case is expected to affect high-profile insider-trading cases, such as those of Galleon Group cofounder Raj Rajaratnam and former Goldman Sachs director Rajat Gupta, who are appealing their convictions on related grounds, Bloomberg reports.
The decision, either way, could also be a big boost for US prosecutors, who in 2014 lost ground when an appeals court overturned the cases of Todd Newman, a hedge fund manager at Diamondback Capital, who was accused of trading on information he heard fourthhand, and Anthony Chiasson.
- Thomson Reuters
The New York-based 2nd US Circuit Court of Appeals held that, to be convicted, a trader must know that the source received a benefit in exchange and that such a benefit was “at least a potential gain of a pecuniary or similarly valuable nature.”
The ruling forced prosecutors under Preet Bharara, the Manhattan US attorney, to drop charges against 12 other defendants out of 107 people charged under his watch since 2009.
After the Supreme Court declined to review that case and that of Chiasson last year, Bharara said it created an “obvious road mad for unscrupulous investors,” according to a Bloomberg News report.
The Supreme Court justices in January agreed to review Salman’s case, over which a federal appeals court in California had issued a potentially conflicting ruling.
Salman argued that his trading was not illegal, as no proof existed that his brother-in-law, in tipping a family member who in turn tipped Salman, received anything beneficial in exchange.
The San Francisco-based 9th US Circuit Court of Appeals rejected that argument, saying that requiring a tangible benefit in such a circumstance would allow insiders to tip their relatives so long as they got nothing in exchange.
Prosecutors are hoping the Supreme Court adopts the 9th Circuit’s view and rejects the 2nd Circuit’s narrow interpretation, which authorities said could result in some people avoiding charges and could affect investigations.
Prosecutors have brought other high-profile insider-trading cases this year. In September, prosecutors filed charges against Omega Advisors’ Lee Cooperman, who has said he is innocent and prosecutors are waiting to decide whether to file criminal charges until the Supreme Court’s ruling.
In June, prosecutors filed charges against Visium Asset Management’s Sanjay Valvani, who was later found dead in an apparent suicide. Valvani had maintained his innocence, and friends and colleagues told Business Insider he was stunned when the government brought charges against him.