Federal prosecutors filed a brief late on Monday night responding to Bassam Salman's bid to vacate his conviction for insider trading on information relayed by a friend. They claim Salman is misinterpreting Supreme Court precedent and trying to "upend insider-trading law" by arguing that tippers must receive a monetary or pecuniary benefit for the trader to be found liable for acting on inside information.
"Petitioner's claim that [the Dirks v. Securities and Exchange Commission decision] should be revised to require that a tipper obtain a 'pecuniary gain' is fundamentally unsound," the government said, referring to a seminal 1983 Supreme Court ruling that tipping is illegal when people receive a "personal benefit" for passing on insider information, including when they "gift" a lead to a relative or friend.
Salman was convicted for trading on information he learned from his friend Michael Kara, who in turn had been tipped off by his brother Maher Kara, a former investment banker as well as Salman's brother-in-law.
In July 2015, the Ninth Circuit affirmed Salman's conviction in a decision written by New York U.S. District Judge Jed S. Rakoff, after finding that Maher Kara had made a gift of confidential information to his brother in line with the Dirks v. SEC decision. Thus the appellate court declined to follow the Second Circuit's landmark U.S. v. Newman decision, which held that prosecutors must prove that insiders received a significant, potentially pecuniary personal benefit in exchange for disclosing tips in order to convict traders who acted on insider information.
In January the Supreme Court agreed to take up Salman's petition, one of its first major insider trading cases in more than three decades. This came just months after the high court rejected the a petition from the U.S. government related to the Newman case. Both Salman and the government have argued that Judge Rakoff's July 2015 ruling created a split between the Ninth Circuit and the Second Circuit.
In an opening brief filed in May, Salman argued that Maher Kara had received no benefit from his brother Michael in return for the information and apparently gave Michael the tips only for "the scant comfort of getting Michael to stop pestering him." Allowing his conviction to stand, he argued, would reduce the "personal benefit" requirement of insider trading law to "a meaningless peppercorn."
The government's brief on Monday blasted Salman's position, saying that he was ignoring the Supreme Court's "clear statement" in the Dirks ruling that a gift of confidential information is enough to establish liability. Under that precedent, the government said, courts need not to inquire whether the tipper received a "psychic value" or if his or her relationship with the recipient is sufficiently close — as long as there's evidence the information was provided for a personal reason not a corporate one.
If the personal benefit requirement could be satisfied only when the tipper receives a pecuniary benefit in exchange for the gift, the government argued, then the Dirks decision's entire discussion of gifts "would have been entirely superfluous."
Narrowing insider trading law as Salman suggested, the government said, would also seriously harm investors and the financial markets, essentially creating "two classes of investors: those with 'cozy' connections to insiders at corporations or the law firms, accountants and bankers who service those corporations . . . and those left on the outside."
In July SEC and Justice Department officials said the facts in the Salman case are in the government's favor, claiming that the case nicely tees up the personal benefit questions. But Salman has also amassed a number of friends of the court on his side, as Mark Cuban and several legal organizations filed amicus briefs in his favor in May.
The original tipper in Salman's case, Maher Kara, was barred from the securities industry in March by an SEC administrative law judge but will be allowed to reapply to work in the field after three years. The judge said a lower penalty was appropriate, considering that "Kara received no financial benefit; rather, he lost his job and has been shunned by those who did benefit."
Maher Kara was also sentenced to probation in the criminal case, as was Michael Kara, while Salman was sentenced to three years in prison.
A representative for Salman declined to comment.
The government is represented by Ian Heath Gershengorn, Anne K. Small, Sanket J. Bulsara, Michael A. Conley, Jacob H. Stillman, David D. Lisitza, Michael R. Dreeben, Elaine J. Goldenberg and Ross B. Goldman.
Salman is represented by Alexandra A.E. Shapiro and Daniel J. O'Neill of Shapiro Arato LLP and John D. Cline of the Law Office of John D. Cline.
The case is Salman v. U.S., case number 15-628, in the U.S. Supreme Court.
--Additional reporting by Ed Beeson. Editing by Marjorie Backman.