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U.S. top court fortifies prosecutors in insider trading cases

(Reuters) - The U.S. Supreme Court on Tuesday made it easier to prosecute insider trading cases, ruling that tipsters who provide confidential information that enables friends and family to profit do not need to get something in return to have broken the law.

A general view of the U.S. Supreme Court in Washington December 3, 2013. REUTERS/Jonathan Ernst

In the court's first insider trading ruling in two decades, the justices by an 8-0 vote upheld the 2013 conviction of Bassam Salman, a Chicago man who made nearly $1.2 million trading on information that came from his brother-in-law at Citigroup Inc C.N.

Justice Samuel Alito, writing for the court, rejected Salman’s view that he could be convicted only if his brother-in-law got something like cash in return for tips, saying friends or family could be found liable because the confidential information can be viewed as a “gift.”

“In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds,” Alito wrote.

The ruling was a major victory for securities regulators and prosecutors, who for two years had been grappling with the ramifications of a decision by a New York-based federal appeals court that some interpreted as agreeing with Salman’s position.

That ruling adopted a narrow definition of what constituted an illegal benefit to an insider, and resulted in cases being dropped or dismissed against 14 of 107 people charged by the office of Manhattan U.S. Attorney Preet Bharara since 2009.

Bharara, who has aggressively prosecuted insider trading and has agreed to remain in his post under Republican President-elect Donald Trump, called the ruling “a victory for fair markets and those who believe that the system should not be rigged.”

Bharara added that “the court stood up for common sense and affirmed what we have been arguing from the outset - that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public.”

The ruling followed a U.S. government push to crack down on insider trading, resulting in Galleon Group founder Raj Rajaratnam’s conviction in 2011 and a $1.8 billion settlement and plea deal in 2013 with hedge fund SAC Capital Advisors LP.

Outgoing U.S. Securities and Exchange Commission Chair Mary Jo White, whose agency in the past six years pursued more than 550 insider trading cases, said the ruling “reaffirms our ability to continue to aggressively pursue illegal insider trading and bring wrongdoers to justice.”

Salman, whose lawyer did not respond to a request for comment, was found guilty in 2013 by a federal jury in San Francisco of conspiracy and securities fraud charges. He was sentenced to three years in prison.

Prosecutors said Maher Kara, a Citigroup investment banker and Salman’s brother-in-law, provided tips about deals involving Citi clients to Kara’s brother, who in turn tipped Salman, who made over $1.5 million that he split with another relative.


The Supreme Court heard Salman’s appeal on Oct. 5 amid competing rulings by federal appeals courts in San Francisco, where his case was heard, and New York, where a wave of insider trading prosecutions has been pursued recently.

The New York-based 2nd Circuit in 2014 overturned the conviction of two hedge fund managers, Todd Newman and Anthony Chiasson, and narrowed prosecutors’ ability to pursue such cases in the process.

Salman had relied on the 2nd Circuit’s ruling to argue that he could not be convicted because no proof existed that Kara received anything beneficial in return. The San Francisco-based 9th U.S. Circuit Court of Appeals rejected that position.

Thursday’s ruling upheld the 9th Circuit decision. Alito said that to the extent the 2nd Circuit’s ruling could be read that way, the holding was “inconsistent” with a 1983 Supreme Court precedent.

Defense lawyers said the ruling provides authorities greater ability to pursue insider trading cases and could help prosecutors fight off efforts by some high-profile defendants to use the 2nd Circuit’s ruling to overturn their convictions.

Among those whose appeals had cited the 2nd Circuit ruling were former Goldman Sachs Group Inc director Rajat Gupta, former hedge fund manager Doug Whitman and former SAC Capital portfolio manager Mathew Martoma.

“The clock has been turned back,” said David Miller, a former prosecutor now with the law firm Morgan, Lewis & Bockius. “The Supreme Court decision today will make insider trading cases easier to prosecute than they were yesterday.”

Still, the ruling had no impact on a separate legal holding in the 2nd Circuit’s ruling that made it harder for prosecutors to obtain convictions in cases involving traders two or more steps removed from insiders.

Arlo Devlin-Brown, a former prosecutor now with the law firm Covington & Burling, said the decision also “leaves open the question of whether someone who is at the boundaries of what would be considered a real friend could count, like a minor acquaintance.”

Additional reporting by Lawrence Hurley and Sarah N. Lynch in Washington