On Wednesday, October 5, 2016, the U.S. Supreme Court heard oral argument in the highly anticipated insider trading case, Salman v. U.S., in which it is anticipated the Court will address conflicting decisions of the Second and Ninth Circuits regarding the requirements for establishing insider trading by a remote “tippee.” Specifically, the Court is expected to rule on what benefit a “tipper” must receive and to what extent the “tippee” must have knowledge of that benefit.
Salman seeks to have his conviction for insider trading overturned. The Supreme Court case, however, focuses not on Salman’s conduct, but on the motive and benefit obtained by his tipper, Maher Kara. Kara was an investment banker at CitiGroup, Inc. who provided insider information to his brother. The brother then passed this information along to Salman.
The Supreme Court articulated the general principles of tipper and tippee liability long ago in Dirks v. SEC: “Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain.” The Dirks Court found that the test for determining whether the corporate insider had breached his fiduciary duty “is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty . . . [a]nd absent a breach by the insider, there is no derivative breach.”
The Second Circuit relied on this language in U.S. v. Newman. The Second Circuit ruled that to impose tippee liability, the government must establish that the tippee knew of the personal benefit received by the insider in disclosing insider information to prove that the tippee knew or should have known of the breach. In effect, Newman requires that the government must show that the insider received a concrete benefit from disclosing the information.
Salman seeks to extend the Newman standard to all insider trading cases, requiring evidence that the tipper received a tangible benefit in exchange for the inside information. The Ninth Circuit denied Salman’s argument that the Second Circuit’s Newman decision should be followed, holding “[t]o the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an ‘insider makes a gift of confidential information to a trading relative or friend.’”
In briefing and at oral argument, Salman again argued that a concrete benefit received by the tipper should be required. Salman argued that the crime of insider trading should be limited “to its core,” which is the insider’s abuse of undisclosed, inside information for his own personal benefit. Salman argued that Mr. Kara only provided the inside information because he was being “pestered” by his brother. During argument, Justice Ginsburg noted that Mr. Kara benefited from disclosing the inside information because he was no longer being pestered. Justine Kennedy indicated that he read the ruling of Dirks as allowing prosecution when the insider gave the information without expecting compensation: “Dirks says there is a benefit in making a gift.”
The government seeks to vastly broaden the theory of tippee liability set forth in Dirks by arguing that the personal-benefit standard in Dirks is satisfied where an insider discloses “corporate information without a corporate purpose.” Justice Alito commented that the government’s interpretation of Dirks is as inconsistent as Salman’s interpretation.
Hard questioning of Salman’s position during oral argument from many of the Justices suggests that the Court’s decision is likely to substantially impact, and perhaps do away with, the standard set by the Second Circuit in Newman.