When the U.S. Supreme Court agreed to hear the case of R. Foster Winans, the Wall Street Journal reporter convicted of trading on advance knowledge of his newspaper's "Heard on the Street" column, it was widely seen as a case about stock market insider trading.
But when the justices finally decided the case last month, it quickly became evident that the decision's most lasting implications may not be for the conduct of trading in the nation's securities markets. Instead, the case's most noteworthy--and troubling--effect may be its impact on the free flow of information and debate that is vital to democratic decision-making.
In one sense, the outcome could be seen as fitting for the case of a newspaper reporter who betrayed his professional trust: Winans' appeal resulted in a decision that has the potential for being used to prosecute not just outright swindlers and insider traders but also whistle-blowers, journalists' sources and almost anyone who appropriates information an employer labels as private.
Unless future courts and prosecutors treat the decision as closely tied to the special circumstances of the Winans case, the ruling could dampen vigorous public debate.
Winans' crime was a plain scam. A co-author of "Heard on the Street," a Journal stock market column, Winans made a deal with two brokers to tip them off in advance about the contents of the influential column, which often moves stock prices one way or the other. On the basis of Winans' tips, the brokers bought and sold before publication the various stocks to be reviewed in the columns, producing trading profits of nearly $200,000 over a four-month period. In exchange, Winans received a share of the earnings.
It was clear Winans had done something wrong, but it was much less clear whether he violated a federal criminal statute. The U.S. Attorney in New York, Rudolph W. Giuliani, charged Winans on the theory that he had committed two kinds of crimes: securities fraud, in violation of the Securities Exchange Act of 1934, and mail and wire fraud, in violation of the parallel federal statutes prohibiting use of wire communications or the U.S. mails to defraud.
The securities fraud charge was controversial because Winans was not a classic inside trader who was an employee or had some other fiduciary relationship with the company whose stocks were being traded. The prosecutor argued that the ban on insider trading should extend as well to situations where the insider, like Winans, has no relationship with the company but has some other duty, such as Winans' duty to the Wall Street Journal not to trade secretly on his information. But the Supreme Court in the past had shown some reluctance to extend securities fraud laws beyond the classic definition.
The mail and wire fraud charges also were questionable because, as recently as June, the high court ruled that the mail fraud law was directed solely at schemes in which someone's "money or property" was taken. It therefore rejected cases against corrupt public officials where a scheme defrauded citizens solely of their right to honest and impartial government--a right the court held too amorphous to constitute "property." Given that decision, could it be said that Winans defrauded the Journal by taking any "property"?
When the Supreme court agreed to hear Winans' appeal of his convictions, the predominant view among white-collar crime and securities law experts was that Winans' convictions would be reversed on both theories.
As it turned out last month, the court deadlocked 4-4 on the government's securities fraud theories. That had the effect of affirming the Winans convictions without setting a national precedent.
On the mail and wire fraud charges, however, the court unanimously upheld the convictions and the theory underlying them. Brushing aside the claim that the Journal had not been defrauded of money or property by Winans' scheme, it held that the newspaper's "interest in the confidentiality of the contents and the timing" of its columns was indeed property within the meaning of the mail and wire fraud laws.
"The confidential information was generated from the business" carried on by the Journal, the court wrote, and thus "the business had a right to decide how to use it prior to disclosing it to the public."
However appropriate this result might seem in Winans' case, the court's language and reasoning could be abused if transplanted to different situations. The decision could be interpreted broadly to mean this: Information that employers label confidential constitutes property, and any "taking" of such property by revealing it constitutes a scheme to defraud. All a prosecutor needs to do is allege some use of the mails or wiresin order to make out a mail fraud or wire fraud charge.
What's wrong with such a broad reading? First, it could discourage socially valuable speech. Although unlikely, it could serve as a basis for prosecuting employees who reveal to a government agency or newspaper toxic dumping by their employers in violation of confidentiality rules. Even more vulnerable might be people who reveal their companies' wrongdoings by writing a book or article for a fee. This expansive interpretation might even allow prosecution of an employee simply for disclosing confidential information that is merely embarrassing to an employer.
Could Be Prosecuted
A broad reading of the case would also make criminal conduct that, if not necessarily praiseworthy, is hardly deserving of a lengthy prison sentence. For instance, a salesperson who moves from one firm to another and takes along a customer list could be subject to criminal mail fraud; so might an investment banker who uses knowledge of companies and markets gained in one job after going to work for someone else. An editor at a publishing house who leaks some of the contents of a book before publication also might be prosecuted.
To reject a broad interpretation of the Winans decision is not to dismiss the very real interests of employers in protecting crucial information. But employers already have remedies for much misuse of information under state civil law governing breaches of duty as well as trade secret laws, which sometimes also provide for criminal sanctions. Adding federal mail and wire fraud charges to the list of remedies carries too many risks of abuse to justify the possible advantages.
Lawyers and courts, accordingly, should look for ways to limit the impact of the Winans decision. Courts, for instance, could make clear that the case involved a plainly improper scheme with the sole purpose of enriching the participants and that the appropriation of information belonging to Winans' employer served no countervailing social purpose, as would an article or book by a whistle-blower. So distinguished, mail or wire fraud charges would not apply to cases where the use of information was not motivated by profit, or where the use, even if profitable, served an important public interest.
Further, prosecutors should exercise their discretion to refrain from pressing mail and wire fraud charges where the facts do not cry out for criminal prosecution, as they did in the Winans situation.
If the decision is thus confined carefully to the sort of unalloyed wrongdoing presented in the Winans case, it could then serve as a valuable instrument for prosecuting criminals without interfering with crucial public debate.