Money Gain Needed for Insider Liability, Justices Told

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By Phyllis Diamond

May 9 — A corporate insider who conveys material, nonpublic information has to do so for a concrete monetary benefit for insider trading liability to exist, convicted fraudster Bassam Salman told the U.S. Supreme Court in a May 6 brief.

The “indeterminate psychological benefit” cited by the federal appeals court that affirmed his conviction is too flexible, he argued. If upheld, it would eliminate the personal benefit requirement, replacing with the broad prohibition against insider trading the Supreme Court repeatedly has rejected.

Circuit Conflict

The high court's decision in Salman's case will resolve an issue central to the federal crackdown on insider trading over the past eight years—must the source of the information have received a tangible monetary benefit for disclosing it?

In late 2014, 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 executives, saying a concrete financial benefit was required (17 MALR 1814, 12/15/14). However, the Ninth Circuit affirmed Salman's insider trading conviction, saying that particular kind of benefit wasn't required (18 MALR 1006, 7/13/15).

In a rebuff to federal regulators, the Supreme Court declined to review the Second Circuit's ruling (18 MALR 1489, 10/12/15). Three-and-a- half months later, however, the justices agreed to take up the Ninth Circuit's decision affirming Salman's conviction.

Uncertainty over the nature of the personal benefit required for insider trading liability, a judicially defined concept, has led to calls for Congress to clarify the issue (19 MALR 304, 2/29/16). According to Salman, the Ninth Circuit's standard is so flexible it effectively would allow prosecutors, not Congress, to define the crime—a violation of separation-of-powers principles.

Salman is represented by Alexandra A. E. Shapiro and Daniel J. O'Neill, Shapiro Arato LLP, New York; and John D. Cline, Law Office of John D. Cline, San Francisco.

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

For More Information

To see Salman's brief, go to http://src.bna.com/eNu.