Justices to Tackle Insider Case Oct. 5

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By Phyllis Diamond

Sept. 9 — Does a person who leaks inside information have to receive a tangible personal benefit for someone who trades on the tip to be liable for insider trading?

The U.S. Supreme Court is poised to hear debate on the topic Oct. 5, two days after it returns for its 2016-2017 session.

The occasion marks the first time the justices will tackle an insider-trading dispute in almost two decades. However they resolve the issue, their decision will have a major impact on insider-trading enforcement for years to come.


The personal benefit controversy arose in late 2014 when the U.S. Court of Appeals for the Second Circuit in United States v. Newman vacated the insider trading convictions of two former hedge fund managers. It said the government didn't prove that the two men—both downstream tippees—knew the information was disclosed by an insider in exchange for a personal benefit, i.e., “at least a potential gain of a pecuniary or similarly valuable nature.”

In a setback for federal enforcers, the Supreme Court refused to review the ruling (193 SLD, 10/6/15).

In January, however, the justices agreed to take up a Ninth Circuit ruling affirming the insider conviction of Bassam Yacoub Salman, who traded on tips from the brother of a former Citigroup investment banker ( Salman v. United States, No. 15-628) (130 SLD, 7/8/15). The Ninth Circuit applied a looser personal-benefit standard, saying the banker's tips to his brother were intended “as a gift of market-sensitive information,” and that that was enough to show that the banker received a “personal benefit” for his disclosures.

Cert Petitions

When the court returns in October, it also will face certiorari petitions by several high-profile defendants. Former Texas tycoon R. Allen Stanford wants the justices to review the Fifth Circuit's decision affirming his conviction for master-minding a decades-long $7 billion Ponzi scheme ( Stanford v. United States, No. 15-1490) (119 SLD, 6/21/16). He claims the government violated his Sixth Amendment right to counsel by seizing all of his assets before trial “without any showing that those assets were tainted.”

Former American International Group Inc. Chairman Maurice “Hank” Greenberg is asking the U.S. Supreme Court to take up the New York Court of Appeals' allegedly erroneous decision allowing the state to proceed with a fraud suit against him ( Greenberg v. People, No. 16-284) (107 SLD, 6/3/16).

The New York Attorney General's lawsuit is preempted by a 1996 federal statute that defines fraudulent practices more narrowly than the broad state law under which he was charged, Greenberg said in an Aug. 30 certiorari petition. Among other differences, he argued, the state law doesn't require a showing of “scienter”—culpable intent.

The AG's response is due Oct. 3.

Other Questions Pending

Other pending certiorari petitions include:

  • Cyan Inc. v. Beaver County Emp. Ret. Fund, No. 15-1439. Corporate defendants seek review of a California state court's refusal to dismiss a lawsuit alleging misstatements in certain offering materials. They say a federal law intended to force compliance with heightened pleading requirements in securities fraud class lawsuits applies to 1933 Securities Act claims.
  • Fried v. Stiefel Labs. Inc., No. 15-1458. A former Stiefel Laboratories Inc. employee says the company and its former chief executive officer committed securities fraud by repurchasing his stock without telling him that the company planned to merge with GlaxoSmithKline PLC (113 SLD, 6/13/16) . The official wants the high court to review the Eleventh Circuit's decision affirming that the defendants weren't liable for failing to disclose material information (41 SLD, 3/2/16) .
  • Special Situations Fund III QP LP v. Deloitte Touche Tohmatsu CPA Ltd., No. 16-52. Investors in a China-based company want the court to review a Second Circuit ruling they didn't state a fraud claim against the Deloitte unit that audited the company's financials. They say appeals court made it too hard for them to plead scienter—culpable intent—against auditors compared to other securities fraud defendants.
  • Sovereign Wealth Fund Sambruk-Kazyna JSC v. Atlantica Holdings Inc., No. 16-201. A Kazakhstani sovereign wealth fund is seeking to overturn the Second Circuit's conclusion that it isn't immune under the Foreign Sovereign Immunities Act from claims it misled investors.
  • DeKalb County Pension Fund v. Transocean Ltd., No. 16-206. Transocean Ltd. investors want the justices to take up a Second Circuit ruling affirming the dismissal of their lawsuit over an allegedly misleading proxy statement. They say the justices previously agreed to review an appeals court ruling raising the same timeliness question. That case settled on the eve of oral argument and was removed from the high court docket.

The Stanford, Cyan and Stiefel Labs cases are slated for conference Sept. 26. Responses in Sovereign Wealth Fund Sambruk-Kazyna and DeKalb County Pension Fund are due Sept. 12 and Sept. 14, respectively.

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com

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