The U.S. Supreme Court granted certiorari this week in a case that is sure to draw significant attention given its likely implications on insider trading liability. Bassam Salman filed the petition after the Ninth Circuit affirmed his insider trading conviction in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015).
Salman was convicted of conspiracy and insider trading arising out of a trading scheme involving members of his extended family. During the time period at issue, Maher Kara, Salman’s future brother-in-law, had access to insider information regarding mergers and acquisitions of and by his firm’s clients that he provided to his brother, Michael Kara. Michael subsequently traded on the information. Michael then shared the information he learned from Maher with Salman. Salman also traded on the information.
Following his conviction, Salman appealed and argued that there was no evidence that he knew that Maher disclosed information to Michael in exchange for a personal benefit. The personal benefit requirement, first derived from the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), requires that the insider personally benefit from the disclosure—including through pecuniary gain, a reputational benefit that will translate into future earnings, or where the insider makes a gift of confidential information to a trading relative or friend. Critical to the third manner of conferring a personal benefit, the Second Circuit recently held in United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014), that to the extent “a personal benefit may be inferred from a personal relationship between the tipper and tippee . . . such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”
Salman urged the Ninth Circuit to adopt the Newman court’s interpretation of Dirks to require more than evidence of a friendship or familial relationship between the tipper and the tippee. The Ninth Circuit declined, holding that doing so would require the court to depart from the ruling in Dirks that liability can be established where the insider makes a gift of confidential information to a trading relative or friend. The Supreme Court likely will resolve whether the concept of a personal benefit addressed in Dirks requires proof of an objective, consequential, and potential pecuniary gain—as the Newman court held—or whether it is enough that the insider and tippee shared a close family relationship.
The Newman decision has already resulted in the dismissal of insider trading charges against several individuals. The Supreme Court’s ultimate decision will therefore provide much needed clarity in this area, given the sharp split between the Second and Ninth Circuits on the issue.