Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every
Speaker 1: day we bring you inside an analysis into the most
Speaker 1: important legal news of the day. You can find more
Speaker 1: episodes of the Bloomberg Law Podcast on Apple podcast, SoundCloud
Speaker 1: and on Bloomberg dot com slash podcasts. The Supreme Court
Speaker 1: refused to undercut efforts to clean up insider trading on
Speaker 1: Wall Street. This week, the Justice has rejected an appeal
Speaker 1: in the largest insider trading case ever brought against an
Speaker 1: individual and former hedge fund manager. Matthew Martoma lost his
Speaker 1: chance to shorten a nine year prison sentence. Joining me
Speaker 1: is Peter Henning, professor at Wayne State University Law School.
Speaker 1: Peter Martoma was convicted in for using tips to make
Speaker 1: two D seventy five million dollars for his employer, S
Speaker 1: a C. Capital Advisors on trades in two pharmaceutical stocks.
Speaker 1: What was his argument before the Supreme Court? The key
Speaker 1: focus of his argument was that from an earlier Second
Speaker 1: Circuit decision by United States versus Newman, that there was
Speaker 1: no personal benefit. He had established a relationship with a
Speaker 1: University of Michigan doctor who was conducting a clinical trial
Speaker 1: and learned from him that in fact, the trial was
Speaker 1: going to be unsuccessful. But he said, look, there was
Speaker 1: no benefit there and therefore I should not have been convicted.
Speaker 1: The Supreme Court, in another earlier decision had said that, well,
Speaker 1: as long as there is some type of personal relationship,
Speaker 1: that can be enough. And the Second Circuit found that
Speaker 1: there was enough of a personal relationship that they upheld
Speaker 1: in the two to one decision mar Thomas conviction. So
Speaker 1: the Justice is refusing the case leaves in place that
Speaker 1: Second Circuit decision in mar Thomas case. Does that decision
Speaker 1: actually widen the definition of who can be prosecuted for
Speaker 1: insider trading? Certainly it does, because what the Second Circuit did.
Speaker 1: They issued two opinions in this case. In the first one,
Speaker 1: they said that the personal benefit test simply didn't apply.
Speaker 1: They then backtracked on that. But one of the things
Speaker 1: they did in the second opinion was they said, if
Speaker 1: you make an unauthorized disclosure of confidential information, So if
Speaker 1: you walk up to a stranger on the street and
Speaker 1: say IBM is about to be taken over go by IBM,
Speaker 1: that that would be considered tipping, and therefore that would
Speaker 1: be a violation of the insider trading laws, and that's
Speaker 1: really an extension of the law. I mean, normally we
Speaker 1: don't think of talking to a stranger as triggering insider
Speaker 1: trading liability, but in fact, according to the Second Circuit,
Speaker 1: that could be enough if you're not authorized to disclose
Speaker 1: that information. So pater. For years there have been case
Speaker 1: after case on the definition of insider trading. What is
Speaker 1: the state of the law right now? Why is it
Speaker 1: so difficult to come up with a definition? Well, I
Speaker 1: think that because this is judge made law, and judges
Speaker 1: sometimes tinker with it, it's hard to say exactly what
Speaker 1: it is now. In about the cases, it's fairly straightforward.
Speaker 1: It's really the ten on the edges where it can
Speaker 1: become more difficult. But for example, Judge Jed Raikoff, who's
Speaker 1: one of the most famous district judges in the insider
Speaker 1: trading area, said, really, insider trading law is quite simple
Speaker 1: and that judges have made it far too complex, and
Speaker 1: so in his view at least, it's really very straightforward
Speaker 1: that if you have confidential information, if you give it
Speaker 1: to someone else and you get some benefit back, and
Speaker 1: it could be a warm, fuzzy feeling for that benefit,
Speaker 1: then that's enough. And that can establish inside or trading liability.
Speaker 1: So because it's judge made, you know, judges aren't always
Speaker 1: very clear in their opinions. Well, the fact that Judge
Speaker 1: Rakoff says that does not bode well for Shawn Stewart,
Speaker 1: an investment banker whose conviction for passing insider tips to
Speaker 1: his father was overturned after he spent a year in
Speaker 1: prison on a three year sentence. Prosecutors are retrying that
Speaker 1: and it's coming before Judge Rakoff. That's right. Well, it
Speaker 1: was reassigned from Judge Swain and she withdrew from the case,
Speaker 1: and now it has come up in front of Judge Rakoff,
Speaker 1: who is although he has a reputation of being tough on,
Speaker 1: for example, the SEC, he has a fairly clear view
Speaker 1: of what constitutes insider trading. And so for Sean Stewart,
Speaker 1: this might not have been the best judge that he
Speaker 1: could draw, or at least not the most favorable judge.
Speaker 1: Although it's not going to be an easy case for
Speaker 1: the government because this was a case in which they
Speaker 1: had a recording about how his father said, I gave
Speaker 1: this to you on a silver platter, but then his
Speaker 1: father later contradicted that and so really it's going to
Speaker 1: be an interesting evidentiary fight in Mr Stewart's case as
Speaker 1: to who is the jury going to believe. So there
Speaker 1: doesn't have to be a quid pro quo there, or
Speaker 1: the quid pro quo could be I'm doing something nice
Speaker 1: for my father, and that's the warm and fuzzy feeling.
Speaker 1: That the warm and fuzzy feeling, you know, I mean,
Speaker 1: the Supreme Court has never said that, but it said
Speaker 1: if you you know, if you tip off a family member,
Speaker 1: and that was in the Salmon case in which they
Speaker 1: upheld a conviction that it was two brothers who were
Speaker 1: very close, and the court said, that's good enough for
Speaker 1: the quid pro quo. You don't need a bag of
Speaker 1: cash like in the ivan Bowski days. If it makes
Speaker 1: you feel better, if it's a gift, then that can
Speaker 1: be good enough. So, Peter, there is another attempt to
Speaker 1: try to clarify insider trading with a bill. Tell us
Speaker 1: about that, well, it was tasked by the House Financial
Speaker 1: Services Committee. It is an effort to actually finally legislate
Speaker 1: a definition of insider trading. But if you read the bill,
Speaker 1: it actually expands what is going to constitute insider trading.
Speaker 1: For example, if I were to break into your office
Speaker 1: and steal confidential information in other words, what's called a
Speaker 1: conversion in the criminal law, then I could be prosecuted
Speaker 1: for insider trading. And that's a little bit outside of
Speaker 1: the norm, but it takes a broader view of what
Speaker 1: is insider trading. And of course people don't really like
Speaker 1: insider trading. There's really a pretty strong feeling against insider trading,
Speaker 1: and that's what makes these cases so tough to win
Speaker 1: for the defendants. I think juries just view insider trading
Speaker 1: as greed. Greed should be punished. Former US a turn
Speaker 1: for Manhattan pret Berrara was known for his crackdown on
Speaker 1: insider trading. Has the law held up? Have his prosecutions
Speaker 1: held up over time? A couple of them failed, Newman
Speaker 1: being probably the most famous one United States versus Newman.
Speaker 1: But since then, you know, if you were to go
Speaker 1: back and re argue those cases in light of Mark Tooma,
Speaker 1: they might well survive. And under the new bill it
Speaker 1: would be easier. The government doesn't have to prove a
Speaker 1: benefit to the source of the information, and if Congress
Speaker 1: were to adopt that law, it would make prosecutors lives
Speaker 1: much easier, and the sec for that matter. Thanks so much, Peter.
Speaker 1: As always, as we delve into insider trading once again,
Speaker 1: that's Peter Hending, a professor at Wayne State University Law School.
Speaker 1: Thanks for listening to the Bloomberg Law Podcast. You can
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Speaker 1: and on Bloomberg dot com slash podcasts. I'm June brosso
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