On October 5, 2016, the Supreme Court in Salman v. United States will hear oral argument on its first insider trading case in nearly 20 years. At issue is whether a tipper must receive a pecuniary benefit to be held criminally liable under 10b-5, or whether disclosure by itself can trigger liability. This case will resolve a circuit split that ranges from the broad view that a tipper is liable if the disclosed inside information is a “gift” to the narrow view that the tipper must receive a tangible pecuniary benefit in exchange for the inside information.
The Second Circuit in United States v. Newman, which is discussed on this blog here, held that to be convicted of insider trading, a tipper must receive a significant, potentially pecuniary benefit in exchange for inside information. In Salman, the Ninth Circuit took the broad view that disclosure of inside information by a tipper to a close relationship is sufficient to trigger liability even if the tipper received no benefit in return. In this case, the tipper gave free information to his brother, who then gave the information to Salman, the tipper’s brother-in-law. Central to the government’s oral argument will be the SCOTUS case Dirks v. SEC, which held in 1983 that “personal benefit” may include inside information in the form of a “gift” to the tipper’s relative or friend. Predictably, Salman will argue that the SCOTUS should adopt the Second Circuit’s ruling in Newman so that “personal benefit” is not reduced to vague dealings that lack consideration between family members or friends.
The SCOTUS’ future interpretation of “personal benefit” is unpredictable. Insider trading is adopted through 10b-5, which is a general fraud statute that does not specifically address insider trading—judge-made-law creates insider trading rules and interprets the SEC’s regulations. Due to the absence of statutory limitation, the SCOTUS has broad discretion to determine what constitutes “personal benefit.” If the SCOTUS wants to reign in fraud, they may take the aggressive approach in Dirks. However, if the SCOTUS wishes to interpret this general criminal statute with leniency in mind of the defendant, they may choose to adopt the narrow interpretation of “personal benefit” as prescribed in Newman. After Newman, New York prosecutors dropped a myriad of criminal insider trading cases due to the stricter interpretation of “personal benefit.” Interestingly, the SCOTUS refused to grant the case certiorari, which could point to the SCOTUS adopting the Newman test—perhaps the Court was induced to clarify the issue after the Ninth Circuit’s ruling in Salman. Another plausible scenario is that the SCOTUS will create a new test for quantifying “personal benefit.” Irrespective of whether the Court adopts the Dirks or Newman approach, the Court may provide guidance on the scope of a “gift” or “personal benefit” necessary to trigger liability. For example, the First Circuit in United States v. McPhail upheld the conviction of a tipper by interpreting “personal benefit” to include a steak dinner that the tipper received from the tippee. Surely, the SCOTUS will not want to reduce “personal benefit” to nominal transactions, which would open the floodgate for prosecutions. Fortunately, we should not have to wait long to see if the gift issue is put to rest.