Despite Ruling, ‘Insider’ Is Still an Elusive Term : Wall Street Probers Hail Winans Decision but Seek More Precise Securities Law Clarifications

With its surprise ruling on insider trading Monday, the Supreme Court gave the government’s massive investigation of Wall Street a shot in the arm and bolstered congressional efforts to define insider trading.

But by splitting 4 to 4 on the issue that had made the government’s insider trading case against former Wall Street Journal reporter R. Foster Winans a cause celebre in securities industry circles, the court provided Wall Street with little guidance on how the federal securities laws should be applied in insider trading enforcement.

“Waiting for Winans turned out to be like waiting for Godot; neither one ever came,” said Rep. Edward J. Markey (D-Mass.) in a reference to playwright Samuel Beckett’s play about two men who waited for a character who never showed up.

“Although the court’s decision gives prosecutors a green light to bring insider trading cases under the mail and wire fraud statutes, it does nothing to clarify the securities laws,” added Markey, whose House telecommunications and finance subcommittee is trying to clarify U.S. securities laws and define insider trading. “The Supreme Court has put the insider trading ball squarely in Congress’ court.”

The Securities and Exchange Commission--which handles civil insider trading cases--has already been working with Markey and other legislators to devise a definition for insider trading. But some think this ruling will ensure that such a definition does become law--and soon.

“I think the fact that they now know they have four votes against them (on the Supreme Court) will increase their enthusiasm for legislation,” predicted Peter Romatowski, a former assistant U.S. attorney who played a key role in the earlier Winans convictions.

The SEC, for its part, stopped short of calling the decision a victory but was heartened by the court’s decision to affirm the securities fraud conviction--tenuous though that affirmation was.

“This decision was very beneficial for the commission . . . because the court agreed that the conduct of Winans was criminal” and not just a violation of Wall Street Journal policy, as Winans had claimed, said John Sturc, assistant chief of enforcement at the SEC and a key figure in the government’s cases against arbitrageur Ivan F. Boesky and investment bankers Martin A. Siegel and Dennis B. Levine.

Winans was convicted in 1985 of securities fraud and mail and wire fraud for leaking confidential information about the Wall Street Journal’s “Heard on the Street” column, which he wrote. But Winans doesn’t fit the mold of the typical corporate insider: a company official or strategist who uses confidential information about pending corporate takeovers, for example, to make money before the information becomes public.

So the case quickly came to be viewed as an important test of the government’s misappropriation theory of insider trading--the right to reach beyond the court’s strict definition of a corporate insider in charging people with insider trading.

This doctrine, in turn, is key to the government’s continuing insider trading investigation, because several of the current cases rely on the premise that it is the misappropriation of confidential information that gives rise to criminal liability.

But those seeking guidance on interpreting the securities laws were frustrated by the high court’s 4-4 ruling on the securities fraud charge.

“It is unfortunate that there is no true resolution of issues regarding the sort of conduct that violates the securities laws,” said Stanley S. Arkin, an attorney for Richard Wigton, a former Kidder Peabody arbitrageur who earlier this year was arrested on insider trading charges.

The charges were subsequently dropped, but the government has promised to refile them and many securities lawyers believe that Monday’s court ruling provides the government with the ammunition it needs to make new charges stick. Arkin declined to comment on how the decision will affect his client’s case.

Mail, Wire Fraud

The 4-4 division has the effect of upholding the securities conviction “and the state of the (insider trading) law remains unchanged,” Romatowski said.

But “I think it’s clear the court will take up this question a second time--on some case with no mail or wire fraud charges,” one government lawyer predicted.

On the mail and wire fraud issue, the justices ruled 8 to 0 that federal laws making mail and wire fraud a crime do apply in this case, “in which an employer was deprived of exclusive use of confidential information.”

Manhattan U.S. Atty. Rudolph W. Giuliani hailed this part of the court’s ruling as “a victory for the government because it provides us with a very clear and precise method for prosecuting these cases.”

Giuliani also predicted “a greater emphasis” on mail fraud charges in future insider trading cases--at least “until the Supreme Court decides the securities issue one way or another.”

In recent months, even the government’s own lawyers had begun to fret that the case was a loser and that, at a minimum, the court would reinterpret the misappropriation theory.

“We were absolutely astonished” when the convictions were affirmed, one government lawyer said. “We expected to lose. So this is an unexpected and tremendous victory for the government, and you can expect to see some aggressive pursuit of insider trading cases now.”