In a highly anticipated decision, the Supreme Court yesterday upheld a man’s conviction for insider trading based on a tip provided by his brother-in-law and rejected his contention that, in order to convict him, the government needed to prove that his brother-in-law had received a financial benefit in exchange for disclosing the inside information.1 Instead, the Court held that the government only needed to show that his brother-in-law made a “gift of confidential information to a trading relative or friend.” The ruling was a victory for the federal government and affirmed its expansive view of prohibited conduct. The decision provides a measure of clarity for future insider trading prosecutions, as well as for corporate compliance programs.
The unanimous decision, written by Justice Samuel Alito, was released merely two months after oral argument. It is the Court’s first insider trading case in almost 20 years. In the interim, however, a substantial body of law has been developed by lower courts.2 The case directly addressed a circuit split between the Ninth Circuit’s case below, United States v. Salman,3 and the Second Circuit’s 2014 opinion in United States v. Newman.4
Bassam Salman, a grocery wholesaler, received stock tips from an “extended family member” – his brother-in-law’s older brother. Salman’s brother-in-law was an investment banker at Citigroup and passed inside information to his older brother. The older brother then fed the inside information to others, including Salman. Salman, who knew that his brother-in-law had provided the inside information to the older brother, then traded on the inside information. Salman was indicted and found guilty after a jury trial on one count of conspiracy to commit securities fraud and four counts of securities fraud.5
At issue before the Supreme Court was the Ninth Circuit’s application of a seminal 1983 Supreme Court decision, Dirks v. SEC.6 In Dirks, the Court addressed the circumstances under which a “tippee” – a person who receives confidential information from an insider and uses that information to trade – may be held liable for insider trading. The Court held that a tippee can be convicted of insider trading if she knows that the “tipper breached a fiduciary duty by disclosing the information.”7 Dirks further held that a breach of a fiduciary duty occurs when a tipper discloses the information “for a personal benefit,”8 and that a jury can infer a personal benefit when the tipper either receives something of value in exchange or, importantly, “makes a gift of confidential information to a trading relative or friend.”9
While Salman was appealing his jury verdict to the Ninth Circuit, however, the Second Circuit issued its decision in Newman, another tippee insider trading case. In Newman, the Second Circuit held that even under Dirks, a jury cannot infer a personal benefit to the tipper unless there is proof of a “meaningful close personal relationship that generates an exchange that . . . represents at least a potential gain of a pecuniary or similarly valuable nature.”10 Pointing to Newman, Salman argued that his conviction should be reversed, because there was no evidence that the tipper, his brother-in-law, had received anything of a “pecuniary or similarly valuable nature.”
The Supreme Court held that the Ninth Circuit had properly applied Dirks, with Justice Alito writing that Dirks “easily resolves the narrow issue presented here.”11 The Court explained that “Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative.’”12 The underlying rationale is that giving the “gift” of information to a relative, who then trades on the information, is logically the same as if the tipper himself traded on the information and then gave the proceeds as a gift to the relative.13 In this case, Salman’s brother-in-law breached his duty to Citigroup when he passed the inside information to his older brother. Salman knew of the duty and breached it when he traded on the inside information.
Without expressly overturning Newman, the Court held that to the extent that the Newman holding requires a tipper to receive “something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends,” this requirement is “inconsistent with Dirks.”14 Thus, the Court made clear that the analysis under Dirks squarely covers tips of inside information to family members and friends.
The Salman case resolves the “tension” between the Ninth Circuit’s ruling below and the Second Circuit’s Newman decision, and removes some of the uncertainty that has surrounded recent prosecutions of insider trading cases. Going forward, in cases where an insider provides material nonpublic information to a family member who trades on the information, prosecutors will only need to show that the tipper made a gift of the confidential information for the personal benefit of the tippee. Salman’s “narrow” holding, however, only clarifies the law for a subset of insider trading cases involving family tips. Disputes may still arise over the extent to which tippers receive “personal benefits” from other types of relationships, as well as the extent to which downstream “tippees” may be aware of the tipper’s breach of fiduciary duty. In fact, Justice Alito specifically noted that the Salman decision did not address other issues decided by Newman concerning the tippees’ knowledge that the information they traded on had come from insiders who had received a personal benefit for the tip.
Prosecutors will certainly use the Court’s decision in Salman to expand the scope of conduct subject to prosecution, and as a result, we will likely see an increase in cases. To protect their economic and reputational interests in light of this increased threat, companies should reassess the adequacy of their insider trading compliance programs and employee training.15