Supreme Court Refuses to Curb Insider Trading Cases

individual and former hedge fund manager. Matthew Martoma lost his chance to shorten a nine year prison sentence. Joining me is Peter Henning, professor at Wayne State University Law School. Peter Martoma was convicted in for using tips to make two D seventy five million dollars for his employer, S a C. Capital Advisors on trades in two pharmaceutical stocks.

What was his argument before the Supreme Court? The key focus of his argument was that from an earlier Second Circuit decision by United States versus Newman, that there was no personal benefit. He had established a relationship with a University of Michigan doctor who was conducting a clinical trial and learned from him that in fact, the trial was going to be unsuccessful. But he said, look, there was no benefit there and therefore I should not have been convicted.

The Supreme Court, in another earlier decision had said that, well, as long as there is some type of personal relationship, that can be enough. And the Second Circuit found that there was enough of a personal relationship that they upheld in the two to one decision mar Thomas conviction. So the Justice is refusing the case leaves in place that Second Circuit decision in mar Thomas case. Does that decision actually widen the definition of who can be prosecuted for

insider trading? Certainly it does, because what the Second Circuit did. They issued two opinions in this case. In the first one, they said that the personal benefit test simply didn't apply.

They then backtracked on that. But one of the things they did in the second opinion was they said, if you make an unauthorized disclosure of confidential information, So if you walk up to a stranger on the street and say IBM is about to be taken over go by IBM, that that would be considered tipping, and therefore that would be a violation of the insider trading laws, and that's

really an extension of the law. I mean, normally we don't think of talking to a stranger as triggering insider trading liability, but in fact, according to the Second Circuit, that could be enough if you're not authorized to disclose that information. So pater. For years there have been case after case on the definition of insider trading. What is the state of the law right now? Why is it

so difficult to come up with a definition? Well, I think that because this is judge made law, and judges sometimes tinker with it, it's hard to say exactly what it is now. In about the cases, it's fairly straightforward. It's really the ten on the edges where it can

become more difficult. But for example, Judge Jed Raikoff, who's one of the most famous district judges in the insider trading area, said, really, insider trading law is quite simple and that judges have made it far too complex, and so in his view at least, it's really very straightforward that if you have confidential information, if you give it to someone else and you get some benefit back, and it could be a warm, fuzzy feeling for that benefit,

then that's enough. And that can establish inside or trading liability. So because it's judge made, you know, judges aren't always very clear in their opinions. Well, the fact that Judge Rakoff says that does not bode well for Shawn Stewart, an investment banker whose conviction for passing insider tips to his father was overturned after he spent a year in prison on a three year sentence. Prosecutors are retrying that

and it's coming before Judge Rakoff. That's right. Well, it was reassigned from Judge Swain and she withdrew from the case, and now it has come up in front of Judge Rakoff, who is although he has a reputation of being tough on, for example, the SEC, he has a fairly clear view of what constitutes insider trading. And so for Sean Stewart, this might not have been the best judge that he could draw, or at least not the most favorable judge.

Although it's not going to be an easy case for the government because this was a case in which they had a recording about how his father said, I gave this to you on a silver platter, but then his father later contradicted that and so really it's going to be an interesting evidentiary fight in Mr Stewart's case as

to who is the jury going to believe. So there doesn't have to be a quid pro quo there, or the quid pro quo could be I'm doing something nice for my father, and that's the warm and fuzzy feeling. That the warm and fuzzy feeling, you know, I mean, the Supreme Court has never said that, but it said if you you know, if you tip off a family member, and that was in the Salmon case in which they upheld a conviction that it was two brothers who were very close, and the court said, that's good enough for

the quid pro quo. You don't need a bag of cash like in the ivan Bowski days. If it makes you feel better, if it's a gift, then that can be good enough. So, Peter, there is another attempt to try to clarify insider trading with a bill. Tell us about that, well, it was tasked by the House Financial Services Committee. It is an effort to actually finally legislate a definition of insider trading. But if you read the bill, it actually expands what is going to constitute insider trading.

For example, if I were to break into your office and steal confidential information in other words, what's called a conversion in the criminal law, then I could be prosecuted for insider trading. And that's a little bit outside of the norm, but it takes a broader view of what is insider trading. And of course people don't really like insider trading. There's really a pretty strong feeling against insider trading, and that's what makes these cases so tough to win

for the defendants. I think juries just view insider trading as greed. Greed should be punished. Former US a turn for Manhattan pret Berrara was known for his crackdown on insider trading. Has the law held up? Have his prosecutions held up over time? A couple of them failed, Newman being probably the most famous one United States versus Newman. But since then, you know, if you were to go back and re argue those cases in light of Mark Tooma, they might well survive. And under the new bill it

would be easier. The government doesn't have to prove a benefit to the source of the information, and if Congress were to adopt that law, it would make prosecutors lives much easier, and the sec for that matter. Thanks so much, Peter. As always, as we delve into insider trading once again, that's Peter Hending, a professor at Wayne State University Law School. Thanks for listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple Podcasts, SoundCloud,

and on Bloomberg dot com slash podcasts. I'm June brosso Is Bloomberg m