In 2014 a New York appeals court nearly changed the way that lawmakers deal with cases of insider trading. The dispute centered around two hedge fund managers who passed along confidential information between tipsters like a game of telephone. While the pair had been convicted in their first trial, the decision was eventually overturned upon appeal. This set a precedent for insider trading cases in which the prosecution had to prove that the tipster directly received some sort of compensation in exchange for their insight.
This state of affairs has changed, though, thanks to a ruling by the Supreme Court this week. The case involved a Chicago-area wholesale grocer who received stock tips from his brother-in-law who had in turn learned them from his brother. The defence claimed that the info simply slipped out in conversation between the close family members. The Court unanimously disagreed with this assessment. Judge Samuel Alito wrote that the tipster “breached his duty of trust and confidence” to his employer, an obligation that the wholesaler also violated by acting on what he knew to be confidential information.
With this decision, prosecutors no longer have to prove that a person who provided insider tips received direct compensation for their knowledge. Perhaps nobody is happier about this news than New York District Attorney Preet Bharara, who warned that the 2014 ruling would create a “roadmap” for “unscrupulous investors.” But after this week’s landmark ruling, he’s singing a different tune. “The court stood up for common sense and affirmed what we have been arguing from the outset—that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public,” said Bharara. “Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”
Questions:
- Why can’t individuals share confidential stock information with outside parties?
- How will this Supreme Court decision affect the litigation of insider trading cases in the future?
Source: Helaine Olen, “The Supreme Court Just Made It Much Harder to Get Away With Insider Trading,” Slate, December 6, 2016. Photo by Jamin Gray.