The Supreme Court on Tuesday gave federal prosecutors a significant legal victory when they pursue criminal cases against investors who use inside corporate tips they got through a chain of tipping. If the original tipper passed on valuable inside data but got no benefit from it other than the satisfaction of making a gift to a relative who uses the tip in investing, those down in the chain who also use the tip can be prosecuted for insider trading, the Court ruled unanimously in the case of Salman v. United States.
In reaching the new result, the Court relied almost entirely on a ruling it had issued on tippers in 1983 in Dirks v. Securities and Exchange Commission. But, in a more important part of the ruling, the Court disagreed with a narrowing of the insider trading law that had been announced two years ago by the U.S. Court of Appeals for the Second Circuit – an appeals court that decides many cases arising on Wall Street.
The Second Circuit Court, in its 2014 ruling in Newman v. United States, had ruled that the insider who passes on the initial tip must have received money or something else of tangible value before those who received the tip and traded on it could be prosecuted for doing so. The federal government had challenged the Newman decision in the Supreme Court, but the Justices declined last year to review that case – presumably because lower courts were not then split on the issue.
The Supreme Court, however, opted to rule on the issue this Term after a split did develop, with the U.S, Court of Appeals for the Ninth Circuit explicitly refusing to follow the Newman approach. In the Salman case, the Ninth Circuit ruled that traders who ultimately got the tip and used it to invest had broken the law even if the initial tipper got nothing more than the pleasure of having made a gift of the tip to a relative who traded on it..
Agreeing that the Ninth Circuit Court had properly felt bound by the Court’s Dirks precedent, the Justices upheld the conviction of a Californian, Bassam Salman. Convicted of illegal insider trading by a federal court jury in California, Salman was sentenced to three years in prison and ordered to pay $730,000 in restitution. Prosecutors offered evidence that Salman had gained more than $1.5 million by trading on inside information about mergers involving Citigroup. That information was initially passed on by a Citigroup employee to his brother, who traded on it and also passed it on to Salman for his use in the market.
The two brothers involving in the initial exchange of the information pleaded guilty and testified against Salman at his trial. All of those involved are part of an extended family; one of those two brothers had been the best man at the wedding of the other brother and Salman’s sister.
In upholding Salman’s conviction based principally on the Dirks precedent, the Court noted that the federal government had urged the Justices to go further and rule that a gift of corporate inside information to anyone for non-corporate purposes is enough to prove securities fraud by the tipper and the recipients. The Court did not explicitly reject that argument, saying only that the case involving Bassam Salman could be decided based only on the Dirks precedent. The decision came in an opinion by Justice Samuel A. Alito, Jr.
The Supreme Court issued two other unanimous rulings on Tuesday:
In Samsung Electronics v. Apple, the Court settled one part of a long-running, high-stakes courthouse battle between the two top makers of smartphones. Ruling for Samsung on a claim by Apple that its South Korea-based rival infringed on the design of Apple’s phone, the Justices found that a forfeiture of profits for infringing on one specific element of a device can be limited to the money derived from that infringement alone, or else the full profits that the infringer had made by selling an entire device including that one element. A lower court was wrong in saying that the only remedy could be that all of the profits must be forfeited, the Court said. The decision, written by Justice Sonia Sotomayor, may allow Samsung to get back some of the $548 million it paid to Apple last December when a lower court refused to delay its decision in Apple’s favor. Samsung also contends that the Apple patent on the specific design is invalid; that claim is up to federal Patent Office review.
The Court, in an opinion written by Justice Anthony M. Kennedy, gave a legal victory to two insurance adjusters who worked under contract for State Farm Fire & Casualty Co. The two had filed a claim in federal court that the company had instructed them to wrongly classify damage done to homeowners by Hurricane Katrina in southern states as flood damage, instead of wind damage, in order to shift State Farm’s liability to the federal government as backer of State Farm flood insurance policies. State Farm had attempted to get the claim dismissed for a technical violation of the federal False Claims Act, because the adjusters had shared information about the incident with news organizations; that violated a confidentiality provision of the Act. The Court, ruling in the case of State Farm v. U.S. ex rel. Rigsby, decided that the violation was not sufficient as to lead to a dismissal of the adjusters’ c laim. In winning their claim, the adjusters shared in the money that had to be returned to the government for the alleged false claim.
