Last week, the Supreme Court agreed to hear United States v. Salman to resolve a split over insider trading liability. Because “[a]ll disclosures of confidential corporate information are not inconsistent with the duty insiders owe to shareholders,” a tipper must receive a “personal benefit” for the tip to violate securities laws. Dirks v. S.E.C., 463 U.S. 646, 661-62 (1983). But what kind of personal benefit, and can it be inferred? Circuit courts are split, and the Supreme Court is about to weigh in.
A little over a year ago, the Second Circuit made it harder to prove tippee liability by holding that a “personal benefit” could not be inferred from a close relationship and instead required an “objective” and “consequential” benefit that “represented at least a potential gain of a pecuniary or similarly valuable nature.” United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014). Six months later, the Ninth Circuit disagreed in United States v. Salman, finding it sufficient to prove that a tipper tipped to “to a trading relative or friend.” 792 F.3d 1087, 1092 (9th Cir. 2015) (quoting Dirks, 463 U.S. at 664). While the Supreme Court passed on Newman, it granted cert and will hear Salmon, addressing what it means to derive a “personal benefit.”
The controversy centers around this quote from Dirks: “The 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.” 463 U.S. at 664. At first glance, the language seems clear. But the actual result in Dirks was that the tipper did not engage in insider trading because he disclosed information not for personal benefit but to expose possible fraud. While the Supreme Court referenced “trading relative or friend,” it did not actually apply that language.
In Newman, insiders at two separate technology companies tipped to analysts, beginning a chain that ultimately led to two indicted tippees. But the only evidence presented by the Government was that one initial tipper and his tippee had “known each other for years,” had “attended business school together,” and discussed “career advice.” 773 F.3d at 452. The other initial tipper and his tippee were “family friends” that met at church and occasionally socialized together. Id. The Second Circuit refused to hold that this evidence amounted to an inferred “personal benefit,” instead adopting the objective test described above. Because tippee liability “is derivative from that of the insider’s duty,” Dirks, 463 U.S. at 659, the Second Circuit reversed the downstream tippees’ convictions.
The Ninth Circuit disagreed with Newman in United States v. Salman, decided in July. There, an employee of Citigroup shared information with this brother about upcoming acquisitions and mergers. The Government presented evidence that the brothers “enjoyed a close and mutually beneficial relationship,” that the tippee brother helped pay for the tippee’s college tuition (though not directly tied to the tipping), that the tippee brother stood in for the tipper’s deceased father at the tipper’s wedding, that the tipper “loved his brother very much,” and that the tipper wanted to “‘benefit [the tippee]’ and to ‘fulfill whatever needs he had.’” 792 F.3d at 1089.
“Personal benefit” is a thorny issue. Will the Supreme Court keep the inferred personal benefit that courts have derived from social or family relationships based on the language in Dirks? If so, what kinds of relationships? The Supreme Court hopefully will bring some clarity to this issue.