December 05, 2016
Securities Litigation & Government Investigations Alert
Securities Litigation & Government Investigations Alert
Today, the Supreme Court issued the awaited decision in United States v. Salman addressing personal benefit in insider trading cases. Addressing the narrow question presented in Salman, the unanimous Supreme Court partially rejected a limited aspect of the Second Circuit’s landmark ruling in United States v. Newman regarding personal benefit in insider trading cases.
On December 6, 2016, the Supreme Court issued the awaited decision in United States v. Salman, partially rejecting a limited aspect of the Second Circuit’s landmark ruling in United States v. Newman regarding personal benefit in insider trading cases. Addressing the narrow question presented in Salman, the unanimous Supreme Court affirmed an insider trading conviction based on a family relationship between the tipper and tippee, overturning the Second Circuit to the extent that Newman required that a tipper also receive a tangible monetary benefit in exchange for a tip to a family member. However, the Court emphasized that the question of the sufficiency of personal benefit to a tipper is entirely dependent on the particular facts involved; a tip between two very close brothers was not a difficult question, but the decision leaves open the broader issue of defining the personal benefit required where there is no family relationship. In addition, Salman also does not address the requirement established by the Second Circuit in Newman that the downstream tippee must know that the original tipper received a personal benefit. So, while Salman makes clear that a family relationship is sufficient to infer the necessary “personal benefit” to the tipper, what constitutes a personal benefit in more attenuated or professional relationships remains an open question likely to be sorted out by the lower courts.
Two years prior to Salman, on December 10, 2014, the Second Circuit issued its landmark ruling in Newman. The facts in Newman involved a trial court’s conviction of two downstream traders who received stock tips from analysts, who received the stock tips (both directly and indirectly) from corporate insiders. The evidence revealed that the traders were so removed from the earlier tips that neither remote tippee was aware of the original source of the stock tip—i.e., that it came from a corporate insider. The Second Circuit reversed the trial court, and in doing so rejected the government’s position that personal benefit to a tipper can be inferred solely from proof of a personal relationship between the tipper and his tippee; instead holding that an insider trading conviction requires proof of “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” United States v. Newman, 773 F. 3d 438, 452 (2d Cir. 2014). The Second Circuit also held that a downstream tippee is only liable for insider trading if he or she knew that the information came from corporate insiders who received a personal benefit in exchange for the information. The Supreme Court denied certiorari in Newman on October 5, 2015.
After the Second Circuit’s decision in Newman, on July 6, 2015, the Ninth Circuit issued its opinion in United States v. Salman. 792 F.3d 1087 (9th Cir. 2015). Salman also involved the conviction of a downstream trader, although the involved tippers and tippees were all related. The tipper, a banker knowledgeable of information about corporate mergers and acquisitions (who is also the convicted trader’s brother-in-law) gave tips on confidential deals to his brother, who passed the tip to their brother-in-law, Salman, who traded on the information. Judge Rakoff, of the Southern District of New York, sitting by designation and writing for the Ninth Circuit, affirmed the conviction and expressly declined to follow the Second Circuit’s ruling in Newman that the tipper must have received a pecuniary or similarly valuable benefit in exchange for the tip. The Supreme Court granted certiorari on January 19, 2016, setting up the potential to resolve a perceived split between the Ninth and Second Circuits over what constitutes a personal benefit for insider trading purposes.
The unanimous Supreme Court affirmed the Ninth Circuit’s decision, holding that a family relationship is sufficient to establish a personal benefit, where the tipper intended his tippee to receive the gift of valuable inside information. Justice Alito, writing the 8–0 opinion, relied on the Court’s earlier ruling in Dirks v. SEC, a seminal opinion from 1983 on tipper liability for insider trading. Most importantly for this discussion, Dirks held that a tippee’s liability is based on the tipper’s breach of a fiduciary duty that occurs when the tipper discloses confidential information belonging to a third party, for a personal benefit. Dirks further had held that a “personal benefit” can be inferred by the jury or fact finder where the tipper gives the information to “a trading relative or friend.” (Slip Op. at 2 (quoting Dirks v. SEC, 463 U.S. 646, 664 (1983)).
Today, in Salman, the Supreme Court held that this holding from Dirks “easily resolves the narrow issue presented here,” (Slip Op. at 8), because the Salman case involved a gift of information from an insider to his brother, a close relative. The Court rejected Salman’s argument that Newman should apply to exonerate him, finding “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.” (Slip Op. at 10 (quoting Newman, 773 F. 3d at 452)). The Supreme Court’s explicit qualifier—“to family or friends”—underscores, in our view, the relatively limited scope of the ruling.
Thus, while this decision is noteworthy and long-awaited, given its somewhat limited scope, federal circuit courts must be the guideposts in further developing what constitutes a “personal benefit” to tippers in cases that do not involve a close familial relationship, and when the defendant is a remote trader, removed by two or three different relationships from the initial tipper. For instance, if the next test case involves a tip between two professional acquaintances, and not two family members, and no money is exchanged, will a court extend the Dirks and Salman line of thinking? We suspect that Salman will apply, yet some courts may take a narrow interpretation of Salman and revert to something resembling a Newman analysis. Either way, we expect continued debate on these issues.
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