The Supreme Court this morning handed down a unanimous decision, written by Justice Alito, in the case of Salman v. United States, in which Bassam Salman was sentenced to three years in jail for trading on inside information that originated with a relative who was an investment banker at Citigroup.
A few points are worth initially mentioning in reaction to the decision.
The U.S. attorney for the Southern District of New York, Preet Bharara, is already claiming vindication.
"The court stood up for common sense and affirmed what we have been arguing from the outset -- that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public," Bharara said in an e-mailed statement reported by Bloomberg. "Today's decision is a victory for fair markets and those who believe that the system should not be rigged."
Yet given a chance expressly to review the Second Circuit's Newman opinion on Mr. Bharara's appeal, the High Court turned down the opportunity. Instead it took this Ninth Circuit Salman case, dealing with Newman only in a limited way: "To the extent the Second Circuit held that the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks." [Dirks being an earlier Supreme Court case on the topic.]
Back in 2014, the Wall Street Journal wrote an editorial cheering Justice Scalia's invitation of a case allowing the justices to clarify insider trading law. "Here's hoping that Justice Antonin Scalia lives forever," was the first sentence of that editorial. It's ironic, almost tragic, in retrospect, in light of Scalia's subsequent death (before this case was heard).
At the time, FutureOfCapitalism wrote:
Where FutureOfCapitalism would gently and respectfully differ with the Journal is on the question of who should do the clarifying. The Scalia-Thomas statement ... speaks of "the norm that legislatures, not executive officers, define crimes." It might have added, "not justices." In an ideal world, clarifying the insider trading laws would be a job for Congress. Earlier efforts by the Supreme Court to clarify the law have only muddied the issue further...
Well, with all due respect to Justice Alito and his fellow justices, they've just gone (precisely as I predicted back in 2014) and muddied it even further. There's a respectable view that the Newman requirement of a payoff to prove an illegal tip is too lax a standard — for one statement of that view, see Professor Richard Epstein's Yale Law Journal article. But the Salman decision only confirms that clarity on this in the end will demand action not by the SEC, by prosecutors, or by the Supreme Court, but by Congress.
Justice Alito's opinion insists that the law as set forth in the Dirks opinion is not "unconstitutionally vague" but rather is "simple and clear." If it's so simple, one wonders why the Securities Industry and Financial Markets Association, a trade group, filed an amicus brief in the Salman case complaining of "unpredictability and uneven application of the insider trading laws." It was a brief that merited not even a mention in Justice Alito's opinion, which seemed to regard the complaint of unconstitutional vagueness as a straw grasped at by a criminal rather than a concern widely held by even scrupulously honest and well-intentioned practitioners in the investment industry. Anyone who expects the Salman decision to improve matters in the unpredictability, vagueness, or unevenness departments is fooling himself. The place to solve this one is Congress. And if the reaction to that claim is that they aren't smart enough to figure it out — well, look where the geniuses on the post-Scalia Supreme Court have taken us on the issue.
