I attended my first Law and Society meeting this year (made easier by the fact that it was held in New Orleans, my newly-adopted city!)   And as Joan indicated in a prior post, she gave a presentation on her most recent project, tentatively titled “Pillow Talk, The Parent Trap, Sibling Rivalries, Kissing Cousins, and Other Personal Relationships in U.S. Insider Trading Cases.”  And very shortly after she concluded, a news story dropped in my inbox about SEC v. Maciocio, involving two longtime friends charged in an insider trading scheme that lasted for several years. 

The reason the case interests me is that I assume the SEC (and the DOJ in a parallel criminal complaint) are teeing it up in light of the pending Supreme Court case of Salman v. United States. 

According to the SEC’s allegations, Maciocio worked for a pharmaceutical company that engaged in business dealings with several other companies.  Hobson was his longtime childhood friend.  The details of their relationship are described in the SEC’s complaint, including their days of Little League baseball, and daily phone calls and emails.

Hobson, as it turns out, was a securities broker.  So, Maciocio tipped off Hobson whenever his employer struck a new business deal – as you do – allowing Hobson to reap nearly $200,000 in trading profits.  Maciocio made similar trades himself.  

But the striking thing about the complaint is that the SEC is extraordinarily vague in describing any personal benefit that Maciocio received from tipping Hobson.  Maciocio profited from his own trades, of course, but in exchange for passing information to Hobson, the SEC only alleges that he received barely-described “investment advice” and “stock tips” – not much of a benefit, considering that Hobson was Maciocio’s broker and presumably would have given advice anyway.  Beyond that, the SEC openly alleges that the tips were simply a “gift” to Maciocio’s “close personal friend.” 

The reason this is striking, of course, is that in Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court – reacting to the extraordinarily bizarre facts before it – invented the rule that gratuitous tipping does not a Section 10(b) violation make.

So the critical question is, does friendship maintenance have legally cognizable value?

Well, that’s what the Supreme Court is set to consider in Salman: whether “gift” of information is enough to count as a 10(b) violation, even in the absence of a concrete benefit to the tipper.  In Salman, though, the giftee was a relative, and the law has a much harder time with the nebulous bonds of friendship.  The difficulty is that without a grand theory of insider trading – which the law has yet to develop – it’s not clear what kind of relationships suffice.  The last thing we want is a case by case analysis about whether a friendship was close enough to count – creating uncertainty for everyone who trades – and there’s no obvious reason why a tip to a casual buddy should somehow be less harmful to markets than a tip to a BFF. Then again, if friendship isn’t enough, the government will make do with whatever benefit peppercorns it can find – steak dinners, anyone? – which hardly makes any more sense.

Point being, Joan – I look forward to seeing what you can make of all this!