Another term of the U.S. Supreme Court has come and gone and, once again as in years past, I’d like to say something about it in this blog. Since it’s my blog, I hereby award myself that wish, over the course of this and the next three posts.
I don’t plan to discuss Jevic Holding. That was a very important decision, re-affirming ideas foundational to bankruptcy law, but … I’ve already taken a couple of cracks at it in this blog, and would have nothing new to say now.
I was tempted, in my earliest outlining of this discussion, by the idea of discussing at some length recent events in the public finance and politics of Puerto Rico. These events (including a very strikingly pro-statehood referendum result) in large part follow from the Supreme Court’s decisions on Puerto Rican matters last term. But I’ll save myself some time and give the matter the ‘elevator’ treatment: subsequent events have been entirely consistent with my treatment of those decisions at the time.
So: what will I discuss? I’ll spend most of the rest of this post on the Court’s big insider-trading case of this term, Salman. Tomorrow I’ll turn to other non-constitutional cases (that is, cases turning on the interpretation of statutes). In particular, tomorrow’s portfolio includes Bank of America v. Miami (on predatory lending and cities as plaintiffs), Honeycutt (on the Comprehensive Forfeiture Act) , and Sandoz v. Amgen, (on the marketing of "biosimilars" under the Biologics Price Competition and Innovation Act.)
On Saturday we’ll discuss some of the big constitutional issues of this term. There’s a trademarks-as-free-speech decision, one on the application of the equal protection clause to racial gerrymandering; one on regulatory takings and … perhaps you’ve heard something about a ‘travel ban’? .
Finally, on Sunday, we’ll discuss sex. This term saw its share of sex-and-the-constitution cases: involving continued resistance to gay marriage, a Facebook post by a convicted sex offender, and even boringly old procreative sex where it intersects with immigration/citizenship policy.
Without further ado….
On December 6, 2016, the Court issued a decision in Salman v. United States, upholding what is known as a “friends and family” insider-trading/securities-fraud conviction.
Defense counsel had argued that Salman should not have been convicted because he had not given the source of his tips anything in consideration for same.
A Citigroup investment banker with a big mouth blabbed to his brother about an impending acquisition. The brother in turn blabbed to Bassam Salman. Neither link in this short chain seems to have involved cash-in-a-briefcase reciprocity one generally sees when an insider trade is featured in a Hollywood movie.
But the court in a 1983 case, Dirks, had said that although some element of exchange is required, cash in the briefcase is not. The benefit to the tipper from the tippee need not be direct or financial. The court in Dirks suggested that amongst family members there is a general you-wash-my-hands expectation that allows a jury to infer personal benefit to the tipper from the family context of the tip itself. “My brother is always bugging my for some good dirt – I had to tell him something so he’d shut up on the subject – I was compensated by silence from that quarter for a little while” – that sort of thing is benefit enough. And juries can presume that sort of thing.
The precedential value of Dirks suffered an apparent blow in 2014, when the 2d Circuit, in United States v. Newman, emphasized that prosecutors may not “prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.”
Even with a friends-and-family tip-off, there should be evidence that represents “at least a potential gain of a pecuniary or similarly valuable nature.” In the case before it in Newman the 2d Circuit found that the evidence “was simply too thin to warrant the inference” that the finder of fact would have to draw. For this and other reasons, the convictions of the defendants in THAT case were reversed. That was especially important because the 2d Circuit is the Circuit that includes Wall Street – it is the one Circuit most important for such matters, and most likely t to be followed by the others. It is not the Supreme Court, though.
So has the great victory the defense bar thought they had won in 2014 has become "dust in the wind" of 2017? Well, not really. As Gregory Morvillo explained on a “corporate compliance & enforcement” blog sponsored by New York University, some of the reasoning involved in Newman survives Salman.
Indeed, a footnote to the SCOTUS opinion says, “The Second Circuit also reversed the Newman defendants’ convictions because the Government introduced no evidence that the defendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips.” When information goes from an insider to a family member to a third party, the ignorance of that third party is a defense. That remains the case. The issues of knowledge of the personal benefit and the nature of the personal benefit required are in principle distinct.
That said: as readers probably know, I personally believe the criminalization of insider trading is a mistake, and I regard every new exception and limitation to that criminalization as a good thing. So this decision is unfortunate.
Here’s a brief piece of good news, before I end this day’s blogging. The famous “who’s on first?” comedy routine associated with the immortal names of Abbott and Costello is apparently now in the public domain.
The 2d Circuit said so last year, and the Supreme Court this year denied cert.So mess around with the punny names of imaginary baseball players all you wish, dear readers, without fear of liability. I’ll be back tomorrow to discuss other weighty Supreme Court stuff.