U.S. Supreme Court’s Decision in Salman Clears a Path for Prosecuting Insider Trading CasesDecember 2016 – Securities & White Collar Alert
On December 6, 2016, the Supreme Court announced its unanimous decision Salman v. United States and resolved the conflict existing between the Second and Ninth Circuits with respect to the “personal benefit” element of insider trading in violation of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. In a narrow holding, the Court reaffirmed its reasoning in Dirks v. SEC and held that a tipper who makes a gift of confidential trading information to a tippee relative or friend may be found guilty of insider trading.
Salman involved stock trading tips that he “received from an extended family member, who originally had received the information from Salman’s brother-in-law.” Salman’s brother-in-law, Maher Kara, worked in Citigroup’s healthcare investment banking group and began to share inside information regarding mergers and acquisitions with his older brother, Michael, who Maher knew traded securities using the inside information. Michael, in turn, shared the information with Salman who also traded using the inside information. Salman, relying on the Second Circuit’s decision in United States v. Newman, argued that his convictions should be reversed because the original tipper, Maher, had not received a “personal benefit” for disclosing the confidential information to his brother Michael, the original tippee.
Newman involved unrelated, remote tippees who were "several steps removed from the corporate insiders." There, the Second Circuit held that it is permissible to infer a personal benefit to the tipper from a gift of confidential information only where there is “proof of a meaningfully close personal relationship [between the tipper and the tippee] that generated an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”1
Relying on Newman's rationale, Salman argued that his conviction should be reversed because the government failed to prove that, in addition to an insider's "gift of confidential information to a trading relative or friend," Maher received anything of "a pecuniary or similarly valuable nature." The Supreme Court rejected Salman’s argument, finding that the question whether Maher had received a personal benefit from giving confidential information to his brother Michael was squarely addressed in Dirks v. SEC, which "easily resolves the narrow issue presented here." In Dirks the Court stated that “[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.” 2 In rejecting Salman's claim, the Court expressly rejected the Second Circuit’s uber-requirement in Newman that a tipper “must also receive something of a ‘pecuniary or similarly valuable nature’” as being inconsistent with Dirks.
In Salman, the Court decided a narrow question on very strong facts that fell squarely within the Court’s reasoning in Dirks. In doing so, the Court made clear that it is permissible for a fact finder to infer that a tipper receives a personal benefit when he or she makes a gift of confidential information to a trading relative or friend, even without proof that the benefit is of a “pecuniary or similarly valuable nature.” In those circumstances, the gift of the confidential information is the functional equivalent of the insider herself trading on the information and presenting the proceeds of the trade to the tippee.
Although the Court clearly rejected Salman's efforts to cabin the holding of Dirks by importing additional elements of material gain for the tipper, it is less clear from its holding to what extent the Court also rejected the government’s capacious efforts to criminalize the disclosure of inside information whenever the tipper discloses confidential trading information to anyone for a non-corporate purpose. This and the many other issues that populate the opaque body of law governing insider trading are left for resolution on another day.
1. Newman, 773 F.3d at 452.
2. 463 U.S. at 663.
© 2016 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.