Much of Wall Street will be closely monitoring the United States Supreme Court in the coming hours. That’s because the nation’s high court, which officially opened its 2016-17 term on Monday, will be hearing oral arguments in an insider trading case, marking the first time in roughly 20 years that it has tackled this always controversial subject.
Indeed, it may surprise people to learn that Congress has yet to take definitive action on this financial crime, leaving its definition up to both the Securities and Exchange Commission, and the court system.
What are the facts of the case before the now-eight justices?
The case in question is Salman v. U.S., which concerns a man from Illinois whom federal prosecutors allege made $1.2 million in stock trades using inside information.
Specifically, the charges state that the defendant’s brother-in-law, who worked for Citigroup Inc., tipped a family member about deals involving the megabank’s clients, and that this family member went on to share this same information with the defendant, who acted on it via a series of profitable trades.
The defendant was ultimately convicted on securities fraud and conspiracy charges in 2013, and sentenced to three years in prison.
Why did SCOTUS grant cert. in this particular case?
SCOTUS accepted this case for review owing to the fact that a considerable conflict of law exists in this area, with the New York-based 2nd U.S. Circuit Court of Appeals and the San Francisco-based 9th U.S. Circuit Court of Appeals issuing contradictory decisions.
In particular, the 2nd Circuit overturned the convictions of two hedge fund managers back in 2014. In doing so, it ruled that in order for such convictions to stand, prosecutors must essentially prove that the inside source of the alleged trader received some sort of tangible benefit.
In an appeal to the 9th Circuit, the defendant in Salman argued that his conviction must be overturned based on this ruling, as no evidence existed to demonstrate that the brother-in-law received anything of value in exchange for the inside information. The court, however, rejected this argument, holding that it would essentially give carte blanche to corporate insiders to enrich friends and family provided they received nothing in return.
What issue is before SCOTUS then?
The basic issue before the eight justices is whether prosecutors must prove that the inside source of the alleged trader received some sort of tangible benefit — money or anything of value — in exchange for the information in order to secure a conviction.
The federal government, the respondent, will argue that this standard would make it far more difficult to combat insider trading and actually encourage this conduct, while the defendant, the petitioner, will argue that the standard articulated by the 2nd Circuit is correct and that his conviction should therefore be overturned.
Stay tuned for updates on this fascinating case …
Consider speaking with an experienced legal professional as soon as possible if you are under investigation or have been arrested on white collar crime charges.