A unanimous Supreme Court reaffirmed the “gifting” theory of insider trading under Dirks and rejected Newman “to the extent” it required more.
The Court’s long-standing rule in Dirks v. SEC, 463 U.S. 646, 664 (1983) allows a jury to infer a tipper’s personal benefit “where the tipper receives something of value in exchange for the tip or ‘makes a fit of confidential information to a trading relative or friend.’”
Recently, the Second Circuit appeared to limit the “gifting” theory. In United States v. Newman, 773 F.3d 438, 452 (2nd Cir. 2014), cert. denied, 577 U.S. ___ (2015), the Court disallowed the Dirks inference without “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 challenged his insider-trading conviction under a Newman-like theory. Citigroup insider Maher Kara tipped his brother, Michael Kara, who then tipped his friend and brother-in-law, Salman. Maher testified he intended to benefit his brother, who testified that Salman knew the tip’s original source (hence, acquired the insider’s duty to disclose or abstain).
The unanimous Supreme Court followed Dirks, and affirmed that a tipper’s “gift of confidential information to a trading relative or friend” allows a jury to infer personal benefit to the tipper.
The Court held Newman was inconsistent with Dirks “to the extent” it requires additional proof that the tipper “must also receive something of a ‘pecuniary or similarly valuable nature’” (but Newman’s remote-tippee didn’t know the original disclosure breached a duty).
Two other important take-aways: (1) The Court ignored the Government’s argument that the “gifting” theory applies to anyone and not just friends or relatives; and (2) Tippees – even remote ones – must know that the original disclosure was improper.
The opinion in Salman v. United States, No. 15-628 (U.S. Dec. 6, 2016), is here.