Court Upholds Fraud Guilt of Newsman
The Supreme Court on Monday upheld the conviction of a former Wall Street Journal reporter who schemed to profit by leaking information about his own stories, giving federal prosecutors a surprise victory in their fight against stock fraud.
But, although concluding that an employee may not profit from his company’s confidential information, the justices failed to make clear what constitutes illegal “insider trading” in the stock market.
The high court’s ruling gave government prosecutors a partial victory in a case that they feared could result in a devastating loss because of a June ruling that had undercut federal fraud statutes. However, other attorneys said that the case of R. Foster Winans was so peculiar that the ruling may not have wide impact.
In addition, the association of stockbrokers said that the high court’s failure to define “insider trading” will put new pressure on Congress to undertake the task.
This case arose when Winans, one of two reporters who wrote the Journal’s stock-tips column called “Heard on the Street,” decided to make money on his inside knowledge. In 1983, he arranged to disclose in advance the details of his column to a broker who would buy and sell stocks based on the information. Typically, a stock rose after a favorable column appeared in the Journal, and the scheme netted Winans and several associates $690,000 in profits.
The Securities and Exchange Commission got wind of the scheme, and Winans was subsequently convicted under two rather vague federal fraud statutes. The securities act says that it is a crime to “employ any device, scheme, or artifice to defraud . . . in connection with the purchase or sale of any security,” and the mail and wire fraud law makes it a crime to use the mails or wires to further “any scheme or artifice to defraud.”
In his appeal to the high court, Winans’ attorney said that his client was an “outsider” who had not engaged in stock fraud but had merely violated his company’s internal policies.
In June, the Supreme Court had stunned prosecutors--and seemed to have bolstered Winans’ appeal--when it ruled that a person who commits mail fraud must gain “money or property” through his scheme and someone else must lose “money or property.” Using this logic, the high court threw out the convictions of several state government officials because the public did not lose money through a scheme that enriched a politician and his friends.
But on Monday, the high court backtracked a bit. A company’s reputation and its confidential information have monetary value, even if it is “intangible,” the court said in unanimously upholding Winans’ conviction on the wire fraud charges.
The confidential information Winans and the others used “was generated from the (Wall Street Journal’s) business and the business had a right to decide how to use it prior to disclosing it to the public,” Justice Byron R. White wrote.
“We have little trouble in holding that the conspiracy here to trade on the Journal’s confidential information is not outside the reach of the mail and wire fraud statutes,” he said. “The Journal’s business information that it intended to be kept confidential was its property.”
However, the justices did have trouble deciding whether this scheme was also a securities violation. They split 4 to 4 on the issue, which has the effect of affirming Winans’ conviction in the lower courts.
Federal officials, who admitted to being worried after the June ruling, said Monday that they were delighted with the outcome.
“This is a major victory for us because it removes the uncertainty surrounding mail and wire fraud,” said Gary Lynch, director of enforcement for the SEC. “This ruling makes clear that, if someone violates his duty to an employer by disclosing market information, it is actionable under federal law.”
Howard Wilson, chief of the criminal section in the U.S. attorney’s office in New York City, said that the ruling will aid the prosecution of a host of stock fraud cases. “The mail fraud statute is used in virtually every insider trading case, and this means that it will remain an effective method of dealing with this kind of conduct,” he said.
However, stockbrokers say they are often uncertain when stock information must be disclosed and when it may be traded on. Their attorneys say it is not clear what is fraud when a broker learns about a pending corporate development.
“The Supreme Court ruling today appears not to have offered any clarification on the issue of insider trading, and we would still like to see Congress resolve the issue by enacting a definition,” Edward O’Brien, president of the Securities Industry Assn., said in a statement issued Monday.
Attorneys representing news reporters and broadcasters had filed briefs with the court, urging the justices to restrain government prosecutors from investigating newsroom disputes. But Jane Kirtley, executive director of the Reporters Committee for Freedom of the Press, said that Monday’s decision will have a “minimal impact” on the press. She doubted the ruling would lead to government prosecutions against persons who leak information to reporters, because such a case would require evidence of a monetary gain by the person who disclosed the information and a money loss by his employer.
Winans, who was fired by the Journal after the scheme was uncovered, now faces an 18-month prison term and a $5,000 fine. His roommate, David Carpenter, was convicted on the same charges in the case (Carpenter vs. the United States, 86-422).
Prosecutors said that two Kidder, Peabody stockbrokers in the case--Peter Brant and Kenneth Felis--paid about $31,000 in kickbacks to Winans and Carpenter. Brant became the government’s key witness and was not given a prison term. Felis was sentenced to six months in prison.
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