The law of insider trading has become even more unsettled since the Supreme Court agreed to hear the appeal of the securities fraud conviction in Salman v. United States.

 

The court will consider what evidence the government must introduce to prove a benefit passed between a source of confidential information and the recipient who trades on it, called the “tippee.”

The Salman case will not be argued until the court’s next term, which starts in October, so a decision may not be issued until 2017. In the meantime, the Justice Department and the Securities and Exchange Commission have to apply the law in its current state, which includes a conflict over what is needed to prove a tippee violated the law.

In an audio version of White Collar Watch, I explore the challenges arising from recent developments in insider trading with Gregory Morvillo and Eugene Ingoglia, partners at Morvillo L.L.P, a boutique law firm in Manhattan.

We discuss the recent developments in the law for proving a violation based on tipping inside information, the potential impact of Justice Antonin Scalia’s death on the Salman case and whether Congress ultimately may step in to settle the matter by adopting a

Until the Supreme Court decides the Salman case, federal judges in Manhattan are governed by the decision of the United States Court of Appeals for the Second Circuit in United States v. Newman. That case overturned the convictions of two hedge fund managers for insider trading because the government failed to prove they had known about any benefit provided to the sources of the information. Morvillo L.L.P. represented one of the defendants, Anthony Chiasson, in the trial and appeal in the case.

In reaching that result, the appeals court added what appeared to be a new requirement to prove what constitutes a benefit that must be received by the tipper. The opinion stated that finding a benefit would be “impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The Justice Department asked the Supreme Court to review the lower court’s decision in Newman, but the justices rejected that request. Preet Bharara, the United States attorney in Manhattan, whose office prosecuted over 80 insider trading cases including the Newman case, said that the failure to review the Second Circuit’s decision could create “a potential bonanza for friends and family of rich people with material nonpublic information.”

A short time later, however, the justices agreed to review the Salman case. The information there was passed between two brothers before being given to a future brother-in-law for trading that produced profit of about $1.7 million. The United States Court of Appeals for the Ninth Circuit in California upheld the conviction, even though the evidence of a benefit involved only a close family relationship, but nothing “of a pecuniary or similarly valuable nature.”

The Supreme Court could adopt the Newman decision’s analysis of a benefit or fix a lower threshold for certain types of relationships like the one in the Salman prosecution — or something different.

Mr. Ingoglia points out in our interview that defining the benefit will not be easy. “What you hope to see is some clarity on what counts as a personal benefit. How do you reconcile the Second Circuit’s language about a ‘meaningfully close personal relationship’ with other language that suggests just intending to benefit somebody might count in certain circumstances?”

Justice Scalia’s death may affect the outcome because he had expressed skepticism about insider trading since it was largely a product of judge-made law rather than legislation. His approach of applying a narrow reading to criminal prohibitions will be missing when the court decides what must be shown to prove a tipping violation.

Looking beyond Salman is the question of whether Congress will finally step forward to define what constitutes insider trading. But even that may not be a good thing, according to Mr. Morvillo. “My own view is I can’t think of a worse group of people to get involved in insider trading than Congress,” he said. “If they do, I think they will screw it up and we will have a worse situation than we do now.”

With the law of insider trading in flux, both the government and defense lawyers have to deal with the uncertainty in the hope that the Supreme Court can provide some clarity when it decides the Salman case.

Please take a moment to listen to this audio White Collar Watch to hear how two experienced securities litigators view the state of the law.

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