Yesterday the Supreme Court issued its decision in Salman v. United States, the first insider trading case to reach the Court in decades. In a unanimous opinion delivered by Justice Alito, the Court affirmed the criminal conviction. The Court, however, declined to adopt the expansive theories the government advanced in support of the conviction, and instead adhered to its decision in Dirks v. SEC, which it said “easily resolves the narrow issue presented here.” The overall impact of the Court’s decision will be to remove one hurdle that the government faced after its setback in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, 477 U.S. ___ (2015), but leave other hurdles undisturbed.
The Decision In Salman, an investment banker who dealt with confidential information about mergers and acquisitions shared that information with his brother with an expectation that his brother would trade on it. The brother did and was caught. Both the investment banker and his brother pled guilty to criminal insider trading violations. The brother also tipped Salman, who was both a friend and relative, and Salman traded as well. He was prosecuted and convicted, and his conviction was affirmed by the Ninth Circuit.
In the Supreme Court, Salman argued that the conviction should be overturned because under Dirks v. SEC, 463 U.S. 646 (1983), the government in an insider trading case against a tippee (i.e., the recipient of material nonpublic information), must prove that that the tipper provided information for the tipper’s personal benefit (rather than the tippee’s benefit), but that in this case the government proved only that the information was shared for the benefit of the investment banker’s brother, not the investment banker himself. The Court in Salman rejected the argument. It pointed to language in Dirks that said that a gift to a trading relative or friend meets the personal benefit requirement because “[t]he tip and trade resemble trading by the insider followed by a gift of the profits to the recipient.” That discussion of gifts in Dirks, the Court concluded,“resolves this case.” In reaching that conclusion, the Court disapproved of contrary language in the Second Circuit’s decision in United States v. Newman, and stated 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…, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.” Under Salman and Dirks, the gift to a relative or friend is the personal benefit to the tipper.
Implications The decision in Salman is an important victory for the government in one respect: it removes the Second Circuit’s requirement in Newman that even in the case of a gift to a friend or relative, the government has to show a personal benefit to the tipper over and above the gift. In all other respects, however, the decision leaves the law in the same state it was before Salman and after Newman.
First, the government urged the Supreme Court to adopt a standard that a gift of confidential information to anyone, not just a trading relative or friend, is enough to prove securities fraud. The Supreme Court did not adopt that standard, no lower court has adopted that standard, and it is inconsistent with Dirks.
Second, the government urged the Supreme Court to hold that a “gift” arises whenever the tipper discloses confidential trading information for a “noncorporate purpose.” The Court also did not adopt that standard.
Third, the Court codified the government’s concession—which the government had resisted prior to the Second Circuit’s decision in Newman—that to establish a defendant’s criminal liability as a tippee, the government must prove that the tippee knew “that the tipper disclosed the information for a personal benefit and that the tipper expected trading to ensue.” That is often a heavy burden, especially in the case of remote tippees.
Fourth, the decision leaves intact the Second Circuit’s statement in Newman that for someone to be deemed a “friend” under the Dirks gift analysis, he or she must have a “meaningfully close personal relationship” with the insider; friendships of a “casual or social” nature are not enough.
Fifth, in cases not involving tips to relatives and friends, the decision leaves intact the Second Circuit’s requirement that the insider’s personal benefit be “objective, consequential, and represent at least a potential gain of a pecuniary or similarly valuable nature.”
Conclusion In an earlier alert based on the oral argument in Salman, titled “Supreme Court Likely to Affirm Insider Trading Conviction in Salman But Leave Much of Newman Intact,”  we noted that Justice Alito, who ended up writing the decision for the Court, stated to government counsel that the government’s arguments for expanding insider trading liability were no more consistent with Dirks than the arguments advanced by Salman’s counsel for narrowing Dirks. In the end, the Court issued a narrow decision, adhering to its decision in Dirks and taking care not to provide support to the efforts to expand or narrow Dirks. As a result, with one important exception reaffirming that gifts to friends and relatives satisfy the personal benefit requirement, the Supreme Court’s decision leaves insider trading law where it was after Newman and before Salman. The government prevailed, but did not convince the Court of its more expansive positions, and the defendant lost but in a way that could leave many other defendants with substantial defenses.