SCOTUS Just Tightened the Insider Trading Rules – Here's What It All Means

Shah Gilani

Let's say you've got a friend, a friend who works as an investment banker, and he gifts you with some inside information. Not for any compensation, just because he wants you to make some bacon, and you make $1.5 million on the trade. Is that cool?

Believe it or not, it used to be. But it's not any more. The U.S. Supreme Court just decided that the free gift of inside information is illegal for you to trade on.

The questions before the court were, if the person passing along the inside information isn't paid or compensated for gifting you with it, how can that be a crime? And, if the person acting on the tip doesn't know the tipster is breaking some fiduciary duty they have, how can the person who makes a trade on that information be committing a crime?

Those questions were answered previously by a New York Appellate Court in the negative – no, it wasn't a crime.

So what happened?

Here's what you need to know to stay on the right side of the new law…

Determining the Value of Inside Information

Prosecutors in California had charged one-time Chicago grocery wholesaler Bassam Yacoub Salman with one count of conspiracy to commit securities fraud and four counts of securities fraud, alleging Salman earned $1.5 million trading on inside information.

On Sept. 1, 2011, Salman was convicted on all counts in the U.S. District Court for the Northern District of California.

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The government said the tips Salman got originated with Maher Kara, then a Citigroup investment banker who gave the information to his brother, who in turn passed it on to his brother-in-law, Salman.

Salman appealed, to no avail. Then another case came up on appeal that gave Salman's attorneys hope.

In 2014, the U.S. Court of Appeals for the Second Circuit vacated the insider-trading convictions of two individuals on the ground that the government had failed to present sufficient evidence that they knew the information they received had been disclosed in breach of a fiduciary duty.

In United States v. Newman and Chiasson, the court said:

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Shah Gilani

About the Author

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Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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