The Supreme Court in Salman v. United States earlier today issued its most significant ruling in an insider trading case in more than two decades. In a unanimous, brief opinion written by Justice Alito, the Supreme Court affirmed the Ninth Circuit and ruled that Salman’s insider trading conviction was appropriate in light of the Court’s 1983 ruling in Dirks v. SEC. The Supreme Court held that federal insider trading laws prohibit corporate executives from giving gifts of confidential information to their family and friends, and rejected Salman’s argument that the government must prove the individual providing the information received a tangible personal benefit in exchange for the information. In upholding Salman’s conviction, the Supreme Court reaffirmed the holding in Dirks that “when an insider makes a gift of confidential information to a trading relative or friend . . . [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.” The decision represents a clear victory for federal prosecutors and a partial reversal of the Second Circuit’s contrary 2014 decision in United States v. Newman.
Indeed, a large amount of recent legal commentary espoused the view that insider trading cases could (and perhaps should) become significantly harder to prosecute. Newman made those cases harder to prosecute in two ways: 1) it ruled the government must prove the benefit the tipper received was much more substantial than previously thought; and 2) it ruled downstream tippees must have knowledge of that benefit to be guilty. Today the Supreme Court largely rejected the first but did not disturb the second. The Court held as inconsistent with Dirks the rule in Newman that a tipper must receive something of a pecuniary or similarly valuable nature in exchange for providing inside information and held that the satisfaction of giving the gift of information was sufficient. While this is not a full return to the status quo ante of insider trading law – because the court left intact Newman’s requirement that the government prove a tippee’s knowledge of the benefit -- the likely result of this opinion will be heightened government enforcement actions and criminal prosecutions related to insider trading.
Finally, despite its obvious significance, the Salman decision was limited in scope and insider trading law remains somewhat in flux. The Supreme Court acknowledged that the issue presented in Salman was a “narrow” one and an easy application of its prior decision in Dirks. The Supreme Court declined to define the benefit requirement more broadly for other cases, and did not address what evidence would be sufficient to prove the tippee’s knowledge of the benefit – an issue that promises to be a challenge for the government and the courts in future cases.