The questioning in Salman v. United States suggests that the Supreme Court will hold that when a tipper and tippee of material non-public information are related by family, that familial relationship is sufficient to constitute a "personal benefit" to the tipper for purposes of the insider trading laws, and the tippee need not provide the tipper with a more tangible benefit. [2] Several Justices opined that Dirks v. SEC, [3] a Supreme Court case from 1983, specifically dictated the result in this case, and that the defendant, Salman, was suggesting a sharp divergence from that law. The Justices seemed likely to decide the issue presented in Salman narrowly, however; in colloquy with the government's counsel, the Court signaled that it would likely avoid the related issues raised by the Second Circuit's controversial 2014 decision in SEC v. Newman. [4] Newman was a case where the tippers and the tippees were securities analysts and hedge fund managers, not family or friends, and in those circumstances that Court held that the government had to prove a personal benefit that was "objective," "consequential" and potentially "pecuniary" or "valuable." In the oral argument in Salman, the Court seemed to accept that tippers almost always gave valuable information to friends or family, so that it may be unnecessary to address the tipping chain issues decided in Newman.

The Newman Case

The Second Circuit in SEC v. Newman brought much of the law of insider trading into dispute when it reversed the criminal convictions of two hedge fund managers who were "remote tippees," allegedly having received from analysts confidential information about company earnings before public release, which the analysts had received from company insiders. Apparently disturbed by the facts that the alleged tipper had not been sued and that the defendants were three or four levels of tips removed from the tipper, the court in effect said that the government went too far. The Second Circuit held that the government is required to prove both that each tippee knows that the tipper personally benefitted from the tip and that mere friendship or goodwill is insufficient to prove a "personal benefit." Instead, the government proof "must be something of consequence;" there must be proof of an "exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature."

The Newman decision has the potential to substantially rein in the government's ability to bring insider trading claims. Following the decision, some defendants successfully cited the case "to dismiss civil and criminal charges or withdraw earlier guilty pleas." [5] At least one district court interpreted the decision broadly to include misappropriation, as well as classical insider trading cases, and throw out guilty pleas where a law firm associate shared confidential information about a planned acquisition with a research analyst who in turn passed the information to brokers who traded. [6]

But other courts have interpreted Newman narrowly, and the Ninth Circuit in United States v. Salman stated that, if Newman could not appropriately be read so narrowly, it was wrongly decided, creating a conflict among the circuit courts.

The Salman Case

In Salman, an investment banker employed at Citigroup disclosed confidential information to his brother about upcoming mergers and acquisitions, knowing that his brother was trading on the information. The brother also passed the inside information to Bassam Salman, engaged to be his brother-in-law, who traded on the tips with knowledge of the source. The brother-in-law argued to the Ninth Circuit that his criminal conviction should be reversed based on the Newman decision because the record lacked evidence that the investment banker had received a pecuniary or other tangible benefit for tipping his brother. The Ninth Circuit rejected that argument and held that proof of a tangible benefit is not required under the Supreme Court precedent of Dirks, which the Ninth Circuit said provided that proof of a gift to a trading relative or friend was enough to show a benefit.

The Supreme Court Argument

In the Supreme Court, Salman argued that to prove a personal benefit it is necessary for the government to establish under Dirks "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," as the Second Circuit held in Newman. But the Justices showed little support for this argument and seemed to believe that Dirks had squarely decided this issue against Salman.

The government implicitly urged the Court to reverse the Second Circuit's holdings in Newman and focus less on the nature of the "personal benefit" to the tipper or the relationship between the tipper and the tippee, and more on whether the tipper made the tip with knowledge that the tippee would trade on the material non-public information. The Justices were concerned that this principle could criminalize a tip from a tipper to a tippee in the circumstance where the tipper and tippee had no personal or professional relationship whatsoever, and also raised questions as to how far down a tipping chain this principle should apply. Faced with this resistance, the Court suggested that almost all insider trading criminal prosecutions involve relatives, close friends or cases of exchanges of things of value, so that it is not necessary for the Court to decide the ultimate reach of the personal benefit test. Ultimately, the government suggested that it would be enough for present purposes if the Court simply reaffirms the Dirks test to affirm the conviction in Salman.

Conclusion

The most likely outcome is that the Court will merely reaffirm the Dirks decision, and affirm the Salman conviction in the specific circumstances where the tipper and tippee are related by family. The Court's opinion likely will not reach the other issues raised by Newman, such as how the "personal benefits" test should be applied to tippers and tippees who are not related (or even friendly), or when downstream tippees should be treated as participants after the fact.