US Supreme Court decision clears way for wider insider trading prosecutions

The US Supreme Court has unanimously upheld a broad definition of insider trading that makes it easier for authorities to prosecute over the misuse of confidential information.

The court held 8-0 yesterday that insiders who give market-sensitive information to friends or relatives can be prosecuted even if they do not receive something tangible in return.

The court upheld the 2013 conviction of Bassam Salman, who had traded on market intelligence that he received from his brother-in-law, a Citigroup investment banker.

“Making a gift of inside information to a relative . . . is little different from trading on the information, obtaining the profits and doling them out to the trading relative. The tipper benefits either way,” Justice Samuel Alito wrote.

The ruling was cheered by prosecutors who worried the high court would adopt the narrower definition used by a 2014 New York federal appeals court decision that has made it much harder to bring insider trading cases there. More than a dozen insider trading convictions were subsequently set aside.

“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,” said Manhattan US attorney Preet Bharara, who has led a multiyear campaign against insider trading that shook the hedge fund industry.

The case was closely watched because insider trading is not defined in US law. In the Salman case, the Supreme Court reaffirmed a 1983 ruling which held that when an insider gives trading information to a relative or friend, it is, in effect, the same as if the insider had traded on the information himself and then given them the profits.

The Supreme Court decision covers insiders who tip close friends and relatives, but is silent on how a more distant relationship should be viewed.

In Salman’s case, his brother-in-law, Maher Kara, worked in Citigroup’s investment banking arm and disclosed word of planned merger deals to his own older brother, Mounir.

The brother traded on the information and also tipped off Salman, who with an associate earned roughly $1.7m in profits. Last year, a federal judge in San Francisco sentenced Salman to three years in prison and fined him more than $738,000.