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Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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Speaker 1: day we bring you inside an analysis into the most

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Speaker 1: important legal news of the day. You can find more

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Speaker 1: episodes of the Bloomberg Law Podcast on Apple podcast, SoundCloud

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Speaker 1: and on Bloomberg dot com slash podcasts. The Supreme Court

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Speaker 1: refused to undercut efforts to clean up insider trading on

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Speaker 1: Wall Street. This week, the Justice has rejected an appeal

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Speaker 1: in the largest insider trading case ever brought against an

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Speaker 1: individual and former hedge fund manager. Matthew Martoma lost his

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Speaker 1: chance to shorten a nine year prison sentence. Joining me

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Speaker 1: is Peter Henning, professor at Wayne State University Law School.

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Speaker 1: Peter Martoma was convicted in for using tips to make

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Speaker 1: two D seventy five million dollars for his employer, S

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Speaker 1: a C. Capital Advisors on trades in two pharmaceutical stocks.

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Speaker 1: What was his argument before the Supreme Court? The key

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Speaker 1: focus of his argument was that from an earlier Second

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Speaker 1: Circuit decision by United States versus Newman, that there was

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Speaker 1: no personal benefit. He had established a relationship with a

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Speaker 1: University of Michigan doctor who was conducting a clinical trial

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Speaker 1: and learned from him that in fact, the trial was

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Speaker 1: going to be unsuccessful. But he said, look, there was

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Speaker 1: no benefit there and therefore I should not have been convicted.

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Speaker 1: The Supreme Court, in another earlier decision had said that, well,

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Speaker 1: as long as there is some type of personal relationship,

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Speaker 1: that can be enough. And the Second Circuit found that

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Speaker 1: there was enough of a personal relationship that they upheld

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Speaker 1: in the two to one decision mar Thomas conviction. So

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Speaker 1: the Justice is refusing the case leaves in place that

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Speaker 1: Second Circuit decision in mar Thomas case. Does that decision

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Speaker 1: actually widen the definition of who can be prosecuted for

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Speaker 1: insider trading? Certainly it does, because what the Second Circuit did.

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Speaker 1: They issued two opinions in this case. In the first one,

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Speaker 1: they said that the personal benefit test simply didn't apply.

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Speaker 1: They then backtracked on that. But one of the things

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Speaker 1: they did in the second opinion was they said, if

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Speaker 1: you make an unauthorized disclosure of confidential information, So if

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Speaker 1: you walk up to a stranger on the street and

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Speaker 1: say IBM is about to be taken over go by IBM,

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Speaker 1: that that would be considered tipping, and therefore that would

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Speaker 1: be a violation of the insider trading laws, and that's

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Speaker 1: really an extension of the law. I mean, normally we

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Speaker 1: don't think of talking to a stranger as triggering insider

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Speaker 1: trading liability, but in fact, according to the Second Circuit,

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Speaker 1: that could be enough if you're not authorized to disclose

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Speaker 1: that information. So pater. For years there have been case

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Speaker 1: after case on the definition of insider trading. What is

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Speaker 1: the state of the law right now? Why is it

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Speaker 1: so difficult to come up with a definition? Well, I

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Speaker 1: think that because this is judge made law, and judges

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Speaker 1: sometimes tinker with it, it's hard to say exactly what

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Speaker 1: it is now. In about the cases, it's fairly straightforward.

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Speaker 1: It's really the ten on the edges where it can

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Speaker 1: become more difficult. But for example, Judge Jed Raikoff, who's

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Speaker 1: one of the most famous district judges in the insider

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Speaker 1: trading area, said, really, insider trading law is quite simple

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Speaker 1: and that judges have made it far too complex, and

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Speaker 1: so in his view at least, it's really very straightforward

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Speaker 1: that if you have confidential information, if you give it

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Speaker 1: to someone else and you get some benefit back, and

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Speaker 1: it could be a warm, fuzzy feeling for that benefit,

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Speaker 1: then that's enough. And that can establish inside or trading liability.

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Speaker 1: So because it's judge made, you know, judges aren't always

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Speaker 1: very clear in their opinions. Well, the fact that Judge

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Speaker 1: Rakoff says that does not bode well for Shawn Stewart,

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Speaker 1: an investment banker whose conviction for passing insider tips to

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Speaker 1: his father was overturned after he spent a year in

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Speaker 1: prison on a three year sentence. Prosecutors are retrying that

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Speaker 1: and it's coming before Judge Rakoff. That's right. Well, it

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Speaker 1: was reassigned from Judge Swain and she withdrew from the case,

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Speaker 1: and now it has come up in front of Judge Rakoff,

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Speaker 1: who is although he has a reputation of being tough on,

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Speaker 1: for example, the SEC, he has a fairly clear view

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Speaker 1: of what constitutes insider trading. And so for Sean Stewart,

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Speaker 1: this might not have been the best judge that he

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Speaker 1: could draw, or at least not the most favorable judge.

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Speaker 1: Although it's not going to be an easy case for

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Speaker 1: the government because this was a case in which they

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Speaker 1: had a recording about how his father said, I gave

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Speaker 1: this to you on a silver platter, but then his

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Speaker 1: father later contradicted that and so really it's going to

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Speaker 1: be an interesting evidentiary fight in Mr Stewart's case as

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Speaker 1: to who is the jury going to believe. So there

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Speaker 1: doesn't have to be a quid pro quo there, or

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Speaker 1: the quid pro quo could be I'm doing something nice

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Speaker 1: for my father, and that's the warm and fuzzy feeling.

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Speaker 1: That the warm and fuzzy feeling, you know, I mean,

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Speaker 1: the Supreme Court has never said that, but it said

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Speaker 1: if you you know, if you tip off a family member,

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Speaker 1: and that was in the Salmon case in which they

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Speaker 1: upheld a conviction that it was two brothers who were

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Speaker 1: very close, and the court said, that's good enough for

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Speaker 1: the quid pro quo. You don't need a bag of

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Speaker 1: cash like in the ivan Bowski days. If it makes

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Speaker 1: you feel better, if it's a gift, then that can

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Speaker 1: be good enough. So, Peter, there is another attempt to

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Speaker 1: try to clarify insider trading with a bill. Tell us

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Speaker 1: about that, well, it was tasked by the House Financial

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Speaker 1: Services Committee. It is an effort to actually finally legislate

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Speaker 1: a definition of insider trading. But if you read the bill,

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Speaker 1: it actually expands what is going to constitute insider trading.

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Speaker 1: For example, if I were to break into your office

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Speaker 1: and steal confidential information in other words, what's called a

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Speaker 1: conversion in the criminal law, then I could be prosecuted

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Speaker 1: for insider trading. And that's a little bit outside of

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Speaker 1: the norm, but it takes a broader view of what

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Speaker 1: is insider trading. And of course people don't really like

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Speaker 1: insider trading. There's really a pretty strong feeling against insider trading,

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Speaker 1: and that's what makes these cases so tough to win

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Speaker 1: for the defendants. I think juries just view insider trading

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Speaker 1: as greed. Greed should be punished. Former US a turn

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Speaker 1: for Manhattan pret Berrara was known for his crackdown on

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Speaker 1: insider trading. Has the law held up? Have his prosecutions

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Speaker 1: held up over time? A couple of them failed, Newman

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Speaker 1: being probably the most famous one United States versus Newman.

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Speaker 1: But since then, you know, if you were to go

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Speaker 1: back and re argue those cases in light of Mark Tooma,

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Speaker 1: they might well survive. And under the new bill it

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Speaker 1: would be easier. The government doesn't have to prove a

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Speaker 1: benefit to the source of the information, and if Congress

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Speaker 1: were to adopt that law, it would make prosecutors lives

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Speaker 1: much easier, and the sec for that matter. Thanks so much, Peter.

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Speaker 1: As always, as we delve into insider trading once again,

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Speaker 1: that's Peter Hending, a professor at Wayne State University Law School.

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Speaker 1: Thanks for listening to the Bloomberg Law Podcast. You can

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Speaker 1: subscribe and listen to the show on Apple Podcasts, SoundCloud,

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Speaker 1: and on Bloomberg dot com slash podcasts. I'm June brosso

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Speaker 1: Is Bloomberg m