WASHINGTON — In a case that could more clearly define what is illegal "insider" information on the stock market, the Supreme Court said Monday it will hear the appeal of a former Wall Street Journal reporter convicted of stock fraud for giving several stockbrokers advance tips on items that would appear in his newspaper column.
The attorneys for R. Foster Winans, the Journal reporter, say he had no inside information about the corporations discussed in his column, and, therefore, should not have been convicted under the federal laws regulating the securities industry.
Called a 'Pure Outsider'
"He was a pure outsider. He had no connection with any corporation being traded," said Benjamin W. Heineman Jr., an attorney representing reporters and broadcasters who have joined Winans' appeal.
The Securities Industry Assn., which represents stockbrokers, also backed the appeal, contending that brokers could be threatened if the government can prosecute all those who deal in stock gossip.
But the Justice Department says Winans engaged in a "fraud or deceit" that used "non-public" corporate information--here, tips on when certains stocks would be featured in the Journal--to make money in the stock market. A favorable mention of a company in Winans' column often helped its stock surge in value.
"These activities netted (Winans and his co-conspirators) trading profits of $700,000," noted U.S. Solicitor General Charles Fried.
In the case (Carpenter, Felis and Winans vs. the United States, 86-422), to be heard next fall, the court will get a chance to draw a line between corporate information that is secret and, therefore, off-limits for traders, and information that is legally accessible.
Winans from 1982 to 1984 was the author of the Journal's "Heard on the Street" column, which reported market gossip about various companies. In October, 1983, he conspired with two stockbrokers at Kidder, Peabody & Co. to tell them the general tenor of the columns in advance of publication so they could trade in the stocks to be mentioned. He received kickbacks from the profits. An investigator from the Securities and Exchange Commission spotted a pattern to the trading and was able to break the conspiracy.
Winans was fired and subsequently sentenced to 18 months in prison. On a 2-1 vote, the U.S. 2nd Circuit Court of Appeals upheld this conviction in May, concluding that Winans' disclosure of "the Journal's own confidential schedule of forthcoming publications" constituted "fraud and deceit" under the laws of the securities industry.
In appealing this decision to the high court, attorneys representing brokers and journalists say the appeals court ruling broadens the scope of the securities law beyond what was intended by Congress.
"This gives the SEC completely unbridled discretion on when they will go after someone," said Heineman, a Washington lawyer representing nine news groups, including the Reporters Committee for Freedom of the Press, the National Assn. of Broadcasters and the American Society of Magazine Editors. "This case goes to the heart of what the stock market is about. His column had information that is literally 'heard on the street.' "
Appeals Court Backed
But in support of the SEC, the solicitor general says the appeals court ruling was correct.
"In making the argument (that Winans did not disclose 'inside information')," he and his co-conspirators "fail to acknowledge the obvious: that their trading directly undermined the integrity of the securities market. Their scheme permitted them to make trades that otherwise would not have occurred, and to do so with an advantage grounded on their use of fraudulently misappropriated information that was not lawfully available to others," Fried said in his brief to the court.