Are Insider Trading Laws Effective? Here's Why Prosecutions Could Become Easier

It pays to be well connected — literally.

Imagine someone — say, your brother-in-law — lets slip some information about the major bank where his close friend or family member works. You adjust your holdings of the big bank’s stock accordingly, and make, say, hundreds of thousands in dividends. As long as your informant didn’t personally benefit from the exchange, you’d get away with it.

That may be about to change.

In an appeal before the Supreme Court on Wednesday, Bassam Salman, convicted of securities fraud in a San Francisco district court in July, may mark the start of a new era in insider trading law. Salman made $1.2 million off of information obtained from his brother-in-law about Citigroup Inc, where the brother-in-law’s brother worked.

The majority of the eight Supreme Court justices seemed to be in favor of upholding Salman’s conviction, on the basis that finding him not guilty would essentially make it legal to profit from the gift of stolen information, Reuters reported.

Salman’s lawyer referenced the 1983 insider trading case Dirks v. SEC, in which the Supreme Court ruled that the person receiving confidential and profitable company information is not liable unless the person’s informant, or “insider,” stands to benefit. Neither Salman nor the Dirks defendant paid their sources of information. But while the Dirks defendant was not convicted, only a few of the justices seemed hesitant to uphold Salman’s conviction on Wednesday.

U.S. Justice Stephen Breyer was one of them. He worried the lower standard for which disclosures fit the description of insider trading could make almost any potentially-profitable corporate leak a crime.

“I’m not worried so much about the case,” Breyer said, according to Reuters. “I’m worried about the line drawing.”

A decision to uphold the conviction would give the Securities and Exchange Commission and regulators a much-needed victory after a New York appeals court overturned the conviction of two hedge fund managers accused of insider trading in 2014. The managers, according to court filings, were not aware of whether their informants “received any personal benefit in exchange for their tips.” The decision forced Preet Bharara, the U.S. Attorney for the Southern District of New York in Manhattan known for his crackdown on insider trading, to drop cases against a dozen other defendants, according to Reuters.