The Supreme Court showed little enthusiasm Wednesday for cutting back on the government’s power to prosecute people who profit from trading stocks based on inside information.
Instead, most of the justices said it made sense to charge people with stock fraud if they knew they were making quick money based on secret tips from an insider, even if they came from friends or family members.
The court heard an appeal from a grocery wholesaler in Chicago who made $1.7 million in stock profits from trading on information passed along from a brother-in-law in California, who in turn learned about it from his younger brother, an investment banker for Citigroup.
For decades, securities regulators and federal prosecutors have brought charges against corporate insiders who use secret tips to buy or sell stocks. This is deemed to be fraud, even though Congress has never passed a law to spell out the crime of insider trading.
White-collar defense lawyers are urging the high court to rein in prosecutions against people like the Chicago man, who were not themselves insiders and learned secrets from friends and family members.
“We are dealing with a crime never defined by Congress,” said New York attorney Alexandra Shapiro, representing Bassam Salman, the Chicago man.
But she ran into steadily skeptical questions from most of the justices.
Justice Elena Kagan described insider trading as “stealing corporate information” and a “kind of embezzlement.” To win a conviction, she noted, prosecutors had to prove that Salman knew he was trading based on information that should have been kept secret.
“You are asking us to cut back significantly … and change the rules in a way that threatens the integrity of the markets,” Kagan said.
Justices Stephen G. Breyer and Anthony M. Kennedy said the high court made it clear in the 1980s that people could be prosecuted if they obtained secret information from a corporate insider.
Prosecutors must also prove that the person leaking the information benefited in some way. Though Salman received no direct benefit, such as a payment, prosecutors argued that there are inherent benefits in sharing such valuable information with family members.
Salman’s attorneys called that argument overzealous, but Breyer said he saw no reason to shield family members. “To help a close family member is like helping yourself,” he said. “It would change the law to accept your argument,” he told Salman’s lawyer.
Justice Department lawyers in their legal briefs said a defeat for the government “would seriously harm investors and damage confidence in the nation’s securities markets.” It could free well-placed people to “reap instant no-risk profits at the expense” of ordinary stockholders, they warned the court.
Justice Ruth Bader Ginsburg questioned the reach of the federal law. “This was two brothers. How far down the line do you go?” she asked.
“Quite a ways,” responded Deputy Solicitor Gen. Michael Dreeben. However, prosecutors must always prove the accused trader knew he was trading based on confidential information from an insider.
Last year, the U.S. 2nd Circuit Court of Appeals overturned the insider trading conviction of several big Wall Street traders. But in that case, lawyers said, there was no evidence the traders knew that their information came from a specific insider.
Wednesday’s argument showed again how the court is a different place without Justice Antonin Scalia. He was the foremost critic of allowing prosecutors to bring charges when the law itself was hazy. A year ago, he had voiced doubts about insider trading cases because Congress had failed to clearly define the crime.
His comments and concerns helped to fuel a series of challenges in the lower courts, but by the time Salman’s case reached the high court, Scalia had died, leaving the defense lawyers without their strongest ally.
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