Just when the Supreme Court appeared to be turning its collective attention away from the standard for insider trading convictions by denying the writ for certiorari in United States v. Newman, the Court today granted cert. in Salman v. United States, which addresses the “personal benefit” that a tipper must receive in an insider trading case. (And speaking of recent cert. grants: kudos to my colleague, Charles Casper, who, along with others, obtained a grant of certiorari in Microsoft Corporation v. Baker, No. 15-457, on behalf of Microsoft, in a case raising a class action jurisdictional challenge).
Back to insider trading. The Court will now take up the following question, as posed by the petitioner in Salman:
Does the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC, 463 U.S. 636 (1983), require proof of 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 United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (U.S. Oct. 5, 2015), or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?
In Salman, the remote-tippee defendant (Salman) received and traded on information received from the brother (Michael) of a Citigroup investment banker-insider (Maher). Maher testified that he provided the information to his brother Michael to “get him off his back.” Michael then provided the information to Salman. The petitioner argued that, under the standard set by Newman, Maher, the insider, gained “nothing” – or at the very least nothing that was “objective” or “consequential” or that represented “a potential gain of a pecuniary or similarly valuable nature.” Maher, it seems, was – like Spaulding Smails in Caddyshack – that family member whose relative was content to declare: “you’ll get nothing and like it!”
The Ninth Circuit, however, explicitly rejected the approach in Newman and determined that it was sufficient that the government proved that the insider “made a gift of confidential information to a trading relative or friend.” Because the government had established that link, the Ninth Circuit (Southern District of New York Judge Jed Rakoff, sitting by designation) concluded that the government satisfied its “personal benefit” burden.
But why did the Supreme Court pick Salman rather than weigh in on Newman? While it is, of course, reading tea leaves, it nonetheless appears that the Court was persuaded by the petitioners’ argument (adopting the Justice Department’s arguments from the Newman petition) that the conflict generated by Newman and widened by Salman creates “uneven enforcement” of the securities laws and that Supreme Court review is necessary to “restore certainty and order” to the law of insider trading.
Moreover, petitioner argued that, unlike in Newman, where the Second Circuit based its decision on a second ground (the defendant’s lack of knowledge of any personal benefit), the “personal benefit” test here was outcome-determinative: apply Newman, judgment reversed; require merely a gift to a family member, judgment affirmed.
As we argued previously in the context of Newman, we think that Newman got it right (or, at least, put us on the right path) by providing clarity as to the level of personal benefit required of a tipper in an insider trading prosecution. What the Court does with Newman and Salman will surely be debated going forward, but in the meantime, there appears to be at least a final word on the subject coming shortly from One First Street.