Significant decision comes after nearly two decades of silence.
For the first time in nearly 20 years, the US Supreme Court has weighed in on insider trading law and handed a victory to the government and its insider trading enforcement efforts. In Salman v. United States, the Court put to bed confusion generated by the US Court of Appeals for the Second Circuit’s decision in United States v. Newman. In Newman, the Second Circuit held that to be guilty of insider trading, (i) a tippee must know that the insider/tipper breached a duty of confidentiality in exchange for a “personal benefit” and (ii) the personal benefit must be an “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similar valuable nature.”
The second part of this holding posed more questions than it answered because it appeared to conflict with the Supreme Court’s 1983 decision in Dirks v. SEC. The Court in Dirks found that an insider/tipper may be liable for insider trading, and a tippee derivative liable, only if the insider disclosed confidential information in exchange for a personal benefit. And this “personal benefit,” Dirks found, can be shown when an insider “makes a gift of confidential information to a trading relative or friend.” But in 2014, Newman injected a pecuniary-gain element into the personal-benefit test, leaving the government and defense counsel to wonder what is required when a tipper gifts information to a relative or friend who then trades on the information. As discussed below, Salman has dispelled this confusion by following Dirks in holding that an insider’s gift of confidential information to a trading relative is a sufficient personal benefit.
The Newman Case
In Newman, defendants Todd Newman and Anthony Chiasson were “remote” or “downstream” tippees charged with trading on material nonpublic information (MNPI) that they received from other tippees concerning earnings information at two prominent technology companies.
At trial, Newman and Chiasson urged the court to adopt jury instructions that predicated guilt upon a showing that they knew the insiders tipped the MNPI in exchange for a personal benefit. US District Judge Richard J. Sullivan found that although such an instruction could be supported by Dirks, he was obliged to follow the Second Circuit’s decision in SEC v. Obus, which, arguably, only required a showing that the tippee knew of a tipper’s breach of duty to establish scienter. Newman and Chiasson were convicted at trial.
On appeal, the Second Circuit reversed both convictions. The court held that a tippee only knows of the tipper’s breach of fiduciary duty if “he knew the information was confidential and divulged for personal benefit.” In other words, the court agreed with defendants that knowledge of a tipper’s breach of fiduciary duty required knowledge that the confidential tip was made in exchange for a personal benefit. But the court further held that a personal benefit cannot be inferred “by the mere fact of a friendship”; rather, it must be established through “proof of a meaningfully close relationship that generates an exchange that is objective, consequential, and that represents at least a potential gain of a pecuniary or similarly valuable nature.” The government appealed the Second Circuit’s decision, but the Supreme Court declined to hear the case.
The Salman Case
In the summer of 2015, the US Court of Appeals for the Ninth Circuit decided United States v. Salman, in which defendant Bassam Yacoub Salman, a remote tippee, had received and traded on MNPI from his brother-in-law Michael Kara, who in turn had obtained the information from his older brother Maher Kara, an investment banker at a large bank. Evidence showed that Salman was aware that the MNPI originated with Maher, and that from 2004 to 2007, Salman and Michael had profited from trading in securities issued by the bank’s clients just before major transactions were announced, but there was no evidence that Maher received any pecuniary benefit for his tips. Salman was convicted at trial.
On appeal, Salman argued that under Newman, the evidence was insufficient to show that Maher had tipped the information to his brother in exchange for a pecuniary benefit or that Salman knew of any such benefit. The court dismissed this argument as a strained misreading of Newman, holding that Newman did not seek to undermine Dirks’s crucial observation that a tipper may obtain a personal benefit when (s)he “makes a gift of confidential information to a trading relative or friend.” Otherwise, as the court noted, “a corporate insider . . . would be free to disclose [MNPI] to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.” Notably, the Ninth Circuit held that Newman’s personal-benefit language must be interpreted in a narrower way than others might attempt to use it, and that to the extent Newman cannot be interpreted so narrowly, the Ninth Circuit would “decline to follow it.” Salman appealed the Ninth Circuit’s holding, and the Supreme Court granted certiorari.
The Supreme Court’s Decision
In Salman v. United States, the Court unanimously affirmed the Ninth Circuit’s holding. The Court squarely rejected Salman’s argument that an insider must receive a pecuniary quid pro quo from a tippee for there to be a sufficient personal benefit. The Court found that Dirks made clear that a tipper breaches a fiduciary duty—and receives a personal benefit—by making a gift of confidential information to a “trading relative or friend,” which clearly happened in this case. Notably, the Court declined to adopt the government’s broader argument that “a tipper personally benefits whenever the tipper discloses confidential trading information for a noncorporate purpose.” Rather, the Court found that Dirks “easily resolves the narrow issue presented here.” In applying Dirks, the Court found that “Maher, a tipper, provided inside information to a close relative, his brother Michael. Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative,’ and that rule is sufficient to resolve the case at hand.”
Regarding the Second Circuit’s holding in Newman, the Court found that “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, Newman, 773 F.3d, at 452, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.” The Court held that Salman’s jury was properly instructed that a personal benefit includes the benefit one would obtain from simply making a gift of confidential information to a trading relative, and, accordingly, upheld the Ninth Circuit’s judgment.
The Supreme Court’s decision is extremely significant. Salman resolves confusion raised by Newman by specifically rejecting—as inconsistent with Dirks—the Second Circuit’s requirement that the tipper must receive something of a “pecuniary or similarly valuable nature” in exchange for the information and that a gift to family or friends was insufficient. In so doing, and on the issue of what constitutes a “personal benefit,” the Salman decision essentially turns back the clock on the law of tipper liability to its status pre-Newman, which had partially derailed the government’s insider trading enforcement efforts. Thus, it appears that Salman is a boon to the government’s ability to get its insider trading efforts back on track.