“Finders, keepers” is not the law. In most of the United States, it is illegal to keep property that has obviously been mislaid without making a reasonable effort to return it. You can keep that $20 you found lying on the platform at Grand Central, but not the one you saw fall out of the pocket of the person walking ahead of you on a country lane.
The law of insider trading has never been grounded in this basic idea of morality. Trading on inside information, according to the American securities laws, is a form of fraud, not theft. The inside trader doesn’t steal anything. She deceives her usually faceless and fungible trading counterpart by entering the market with a corporate secret up her sleeve. Or, in a related theory, she deceives her employer by using information gleaned at work to profit without the boss’s knowledge and permission.
{mosads}The fit between fraud and insider trading has always been awkward and counterintuitive, at least for non-lawyers if not also for courts. This week, for the first time since 1997, the Supreme Court confronted this difficulty when it heard arguments in the case of Bassam Salman. Salman made over $1 million trading on information about healthcare stocks he got from his sister’s fiancee, whose access to tips came through a brother working at Citigroup.
Behind Salman’s case lurks an even more substantial insider trading case that the court declined to hear earlier this year: Manhattan U.S. Attorney Preet Bharara’s prosecution of hedge fund traders Todd Newman and Anthony Chiasson. When a federal court of appeals threw out their convictions in 2014, it upset a raft of additional guilty verdicts in a highly publicized campaign against insider trading in the New York fund world. Of Bharara’s 80 convictions, 14 have been reversed or dismissed and more are under attack.
Newman and Chiasson, more or less, pocketed someone else’s dropped money. They didn’t innocently overhear anonymous whispers on a midtown elevator, something the law has never considered a basis for the crime of insider trading. The information they received — advance news about earnings results of the tech companies Dell and NVIDIA that earned over $70 million for their funds — came to them down a chain of tippers engaged in the casual passing of favors that greases the investment business.
The court freed Newman and Chiasson, and thus a number of hedge funders with similar convictions, because the prosecutors could not prove the traders knew the identity of the people who originally leaked the earnings tips or their specific motivations. The court also said that, in order to be criminal, leaks had to be intended to generate some material gain for the leakers.
The courts, not wanting to criminalize inadvertent disclosures and whistleblowing, have long said that a criminal tipper must have disclosed information for “personal benefit.” Judges have worried that at the bottom of a slippery slope lies an extreme rule barring trading unless everyone enjoys parity of knowledge, a rule which would defeat the purpose of research and the investment industry.
But the notion that Newman and Chiasson did not know they were trading on illegally disclosed information is preposterous. A well-known securities regulation prohibits companies from releasing earnings news selectively to favored audiences. Even if the rules had not made the
Dell and NVIDIA leaks illegal, it would obviously be improper for those working inside a company to tell their associates in the investment business what is coming down the pike.
In other words, Newman and Chiasson well knew who their “found money” belonged to, and that the real owner did not mean for them to use it. (The Supreme Court ruled a long time ago that nonpublic information can be a corporation’s property.) The decision in their case has created a terrible “don’t ask, don’t tell” rule for inside traders in New York’s investment industry: As long as one does not know the original source of or motivation for a lucrative leak, one is free to trade away.
The impending decision in the Salman case, which came to the Supreme Court from San Francisco, is thus exceedingly important. The court, if it can muster five votes, could affirm Salman’s conviction and reject the ruling in Newman and Chiasson’s case, holding that even inside information shared purely from the affinities of family or friendship, without any “material benefit” to the tipper, cannot be used to trade. (Under rules of criminal procedure, any convictions that the government has already lost on final appeal could not, however, be reinstated).
Judicial decisions are necessarily incremental, though. The recent oral argument at the Supreme Court was disappointingly small-bore, focusing almost entirely on the linguistic nuances of one of the court’s prior rulings on insider trading, and on the question of what sort of benefit one enjoys from giving another person a gift.
This may have been inevitable. The court is constrained to work within the cramped construct of insider trading as fraud, cobbling together a theory of deception broad enough to catch the venal traders but not too broad to implicate those who unwittingly trade on nonpublic facts.
The public would be better served if Congress, where reform of insider trading law has been discussed, were to see the connection to those old principles of found property law. Inside information, unlike a $20 bill, can’t really be returned to its rightful owner.
But the law should say that if you receive non-public knowledge under circumstances in which a known corporate owner clearly does not mean you to have it, then you may not “keep” it by exchanging it for a cash windfall in the securities markets. (An exception protecting whistle-blowing would not be difficult to draft).
Such a rule has a home in enduring legal ideas and makes a lot more sense than current law. And it would have produced unassailable convictions of not only Salman, but also Newman, Chiasson and many of the sort of traders in the clubby fund industry who traffic in favors and secrets.
Buell is a professor of law at Duke University whose new book is “Capital Offenses: Business Crime and Punishment in America’s Corporate Age” (W.W. Norton & Co.).
The views expressed by Contributors are their own and are not the views of The Hill.