On December 6, 2016, the U.S. Supreme Court issued its first insider trading decision in nearly two decades unanimously affirming the Ninth Circuit and holding that an insider’s “gift” of confidential information to a “trading relative or friend” is sufficient to trigger insider trading liability under federal securities laws.
In Salman v. United States, the Supreme Court held that a person who discloses inside information receives a “personal benefit” if that person “gifts” such information to a “trading relative or friend.” This holding rejects the more stringent requirements articulated by the Second Circuit in United States v. Newman, which required the government to prove that a tipper received something that “represents at least a potential gain of a pecuniary or similarly valuable nature,” and opens the door to insider trading prosecutions in cases involving tips passed on to family and friends.
The facts of Salman are straightforward. The insider—an investment banker—disclosed confidential inside information to his older brother, who then passed that information to Salman—an extended relative. After trading on the information to make substantial profits, Salman was federally charged with and convicted of multiple counts of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b-5.
Because Section 10(b) and Rule 10b-5 do not expressly prohibit insider trading, but rather generally proscribe fraudulent practices in the trading of securities, the government was required to prove that Salman, without disclosure, traded on inside information in breach of a duty of trust and confidence owed to the source of that information. Salman’s liability as the receiver, or “tippee,” of inside information, therefore, derived first from the insider’s breach of a duty in disclosing the information to his brother.
On appeal, Salmon argued that the government had failed to establish that the insider in his case had breached a duty because the insider here had received no tangible benefit in passing along the information to his brother. The Ninth Circuit, however, rejected Salman’s position and instead relied on Dirks v. SEC, a civil case in which the Supreme Court had held that the giving of a gift to a trading relative or friend was enough.
The Supreme Court agreed with the Ninth Circuit and extended Dirks’ application to the criminal context. To rule otherwise, the Supreme Court explained, would open up a backdoor route around the insider trading rules because a tipper’s gift of inside information “effectively achieve[s]” the same result that would ensue if the tipper had unlawfully traded on the inside information himself and then gifted the proceeds to a relative or friend.
The practical effect of Salman is to relax the evidentiary burden that the government must carry in an insider trading case involving tips to family and friends. Importantly, however, the case only concerned the “narrow issue” of what constitutes a “personal benefit,” and did not disturb other stringent requirements that courts place on the government in insider trading cases. And while Salman diminishes the “personal benefit” element, it does not extinguish it. The Supreme Court’s use of the term “gift” and requirement that it be given to a “trading relative or friend” inherently limits the government from prosecuting cases involving casual or inadvertent disclosures of inside information.