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US Supreme Court To Decide What Constitutes Insider Trading

For former SAC-linked traders Todd Newman and Anthony Chiasson, the last three years have been an emotional rollercoaster: the two portfolio managers, who had previously worked at funds affiliated with Steve Cohens'SAC Capital, were charged and found guilty of insider trading in 2012.  Convicted and given lengthy prison sentences, Newman and Chiasson appealed their convictions and won in a landmark decision by the Second Circuit Court of Appeals which also put into doubt just what insider trading is and under what conditions the US can prosecute.

As Bloomberg recently reported, in reversing their convictions, the appeals court turned insider trading law on its head for defendants who are more than one person removed from the source of a tip. From now on, the court ruled, the government would have to prove that such a trader was aware that whoever disclosed information from inside a company knew that it was confidential information and that they had leaked it in exchange for some kind of benefit. Oh, and by the way, the court added, the benefit has to be something tangible, almost akin to a financial payment. Simple friendship isn't enough.

The decision sent shock waves through Wall Street. Suddenly, for such cases, it was much, much harder to prove illegal insider trading. The SEC's phones started ringing with traders who had been convicted or who had settled civil cases, asking for their settlements to be overturned. Bharara's near-perfect record of more than 80 convictions and guilty pleas came under threat. One high-profile conviction, that of former SAC portfolio manager Michael Sternberg, is expected to be overturned if the Newman-Chiasson ruling stands. The appeals court turned down Bharara's request to rehear the case in April, which leaves the Supreme Court as the only remaining legal option.

After the denial for a reheating, many on Wall Street (ostensibly those who may have engaged in comparable conduct) had been wondering whether U.S. Attorney Preet Bharara would ask the Supreme Court to consider an appeals court ruling that could taint his legacy as the policeman of Wall Street. "The deadline for Bharara to make a decision was July 2. But in a sign of how complex that decision is, the solicitor general just requested that it be extended to Aug. 1."

Today, with just one day to go until Bharara deadline runs out to plead the SCOTUS to opine on redefining what "insider trading" means , we found out why Bharara had requested the extension: as Reuters reports, the U.S. Justice Department asked the Supreme Court on Thursday to reverse a federal appellate court's ruling that authorities said limited their ability to pursue insider trading cases.

Solicitor General Donald Verrilli filed a petition seeking review of a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that had reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson.

So in addition to being the ultimate arbiter on Obamacare, and same sex marriage, the US Supreme Court will now have to decide just what constitutes insider trading.

What happens next, aside for Newman and Chiasson putting their future on hold yet again?

Bloomberg laid out the potential pitfalls of the case as follows: "Asking the country's highest court to consider the case is a risky move in itself. No single federal law defines insider trading, which means that it has been defined, over the years, through court decisions and SEC regulations. If the Supreme Court agrees to hear the case, it could well issue a ruling that's even worse for Bharara than what he has to work with now. The court could even decide that insider trading isn't a crime. In that worst-case scenario, the Justice Department would have to look to Congress to pass a bill that makes it illegal."

In retrospect, a decriminalization of insider trading may just be what the US needs: after all, when it comes to crime on Wall Street, it has been exhibited time and again that employees of Too Big To Fail banks will never, under the current captured legal regime, be prosecuted - that's what civil penalties and government funding settlements are for. Push too far, send an executive to prison, and some Congressman or Judge just may not be collecting their year-end bonus from their favorite Wall Street donor.

So it would be only "fair" if the stigma of Wall Street's oldest "crime" is also removed from those entry and mid-level employees who are most often entangled in insider trading cases. After all, what better way to get rich fast and attain a "Too Big to Prosecute" badge than by making some serious cash on a few "sure thing" transactions.

As for the rest of the US population, it would hardly care: it is already comfortably numb from all the crime it has seen over the past 7 years on Wall Street, most of which goes unpunished, and which leads to what the Times reported earlier today, that "Banks ‘fail to learn’ from rigging scandal." Well, how are they expected to learn when nobody ever does any prison time (except for a certain Indian "spoofer") and where shareholders foot the civil penalty bill - without any fear of a proportional response the crimes will continue.

So maybe the best option is indeed to make the playing field equal for all without pre-judgment: even here the biggest perpetrators of insider trading crimes, the Steve Cohens of the world, never saw any actual punishment, and were forced to at most sell a few Picassos to foot the civil penalty.

Finally, with the US and global capital markets already a centrally-planned laughing stock in which only algos spoof each other to boring oblivion, perhaps one last trading hurrah will finally emerge when traders trade on nothing but "tips" and "sure things."

Over to you, "impartial" Supreme Court judges.