For two years, stock traders and the attorneys who represent them said insider-trading law was a muddle, with no one knowing what exactly is or isn’t legal. On Tuesday, the U.S. Supreme Court said it had “easily” settled the question.
No one doubted that a trader who paid cash to an insider for privileged information faced prison. But what about the trader who got the tip from a friend or golfing buddy as a mere gift? Is it illegal to trade on that?
In a unanimous decision, the Supreme Court declared that it is. And that eliminated the confusion that had plagued insider-trading law since December 2014, when a New York-based appeals court made it harder for prosecutors to bring such cases.
"The Supreme Court’s decision is pretty simple,” said Peter Henning, a law professor at Wayne State University Law School in Detroit. “The Supreme Court said today that the law is what we always thought it was” -- that simply making a gift of inside information “can trigger insider-trading liability."
In other words, Henning said, both the CEO who makes a gift of secret news to his brother-in-law on the back nine, and the brother-in-law himself, remain at risk for an insider-trading conviction -- even if there was no cash exchanged between the two.
“Golf buddies, roommates and others are back on the hook,” Henning said.
The ruling came in the first insider-trading case to be considered by the Supreme Court in two decades and answered a question that had divided federal appeals courts. It restored some, though not all, of the leverage lost by prosecutors and the Securities and Exchange Commission in the 2014 case.
“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,” U.S. Attorney Preet Bharara in New York said in an e-mailed statement. “Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”
The decision likely undercuts efforts by some Wall Street figures to overturn their insider-trading convictions. Among those watching the Supreme Court case were former Goldman Sachs Group Inc. director Rajat Gupta, hedge-fund manager Doug Whitman and Galleon Group co-founder Raj Rajaratnam.
They and others have been trying to overturn their convictions on grounds that the Supreme Court soundly rejected on Tuesday -- that tippers must get a tangible benefit to be at risk of prison. The Supreme Court said there was no such requirement.