The Evolution of Insider Trading
In the world of finance, one of the most malleable legal terms is “insider trading.” It may seem obvious to financial experts, but many don’t fully appreciate how convoluted the laws surrounding this form of securities fraud really are.
The standard definition of insider trading is, “Trading on material nonpublic information,” which seems straightforward enough. In fact, in many cases it is as straightforward as a director telling her friend or relative to buy stock in her company before they announce a major merger. That is a textbook case study of insider trading. But that doesn’t mean there aren’t questions left unanswered by the current laws.
For instance, if a banker tips off his sister to a big deal and the sister tells her husband about it, is it insider trading simply because the parties are related or does the prosecution have to prove the tipper/banker received something of value in return for the leak? It seems there isn’t a clear answer to that question just yet, but we may have one soon.
The U.S. Supreme Court is about to hear a very similar sort of case where a banker tipped off his brother and the brother told his brother-in-law about a deal. Salman v. U.S., 15-628 is ongoing and we don’t really have a clear indication of where it is heading just yet, but we do know the prosecution must show some sort of “personal benefit” for the tipper that pushed him to leak information.
Whatever the final call in this case, it could have far reaching consequences for the financial services industry. Bassam Salman, the accused, got trade tips from his brother-in-law, whose brother works at Citibank as an investment banker. When the case went up to the local court in California, the court said the relationship between the brother and brother-in-law was enough to prove insider trading.
However, if the Supreme Court disagrees with that verdict, the floodgates to insider trading would be opened, according to prosecutors. Family members could leak sensitive, nonpublic information and their relatives could trade on it freely, so long as they can prove they didn’t give anything valuable in exchange for the information.
A similar case went up to an appellate panel in New York in December 2014. That court didn’t believe insider trading could be pinned solely on family ties and the verdict eventually led to the reversal of over a dozen prior convictions.
This goes to show how vague and unwieldy the concept of insider trading is. It is much easier to be sure of liability or guilt in criminal cases when there is a paper trail of money or corporate actions that were unethical. Even emails amongst colleagues can be sufficient to prove misconduct. But insider trading is a legal tangle that is yet to be fully defined. The law evolves as time goes on and more such cases continue to be heard which help establish more firmly how a violation is defined.