Yesterday’s oral argument in Salman v. United States, the first insider trading case to reach the Supreme Court in nearly 20 years,left little doubt that the Court will affirm the criminal conviction in that case. It also suggests that the Courtmight do so on grounds that i) ignore the government’s efforts to expand the standards for liability set forth in Dirks v. SEC,and ii) leave much of the Second Circuit’s decision in United States v. Newman intact. We discuss key aspects of the oral argument below.
Background. Salman involved an investment banker’s communication of material nonpublic information to his brother, who communicated the information to his brother-in-law. The brother-in-law traded and was convicted of insider trading. The Ninth Circuit affirmed. In the Supreme Court, Salman’s counsel argued that for the trading to have been actionable, the government should have been required to prove that the insider benefited from the tip to his brother. She relied in part on the Second Circuit’s decision in Newman, which stated that in the case of a tip by an insider to a friend who trades, the government has to prove that the insider received a benefit from the tip that was “objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature."
Salman’s Likely Inability to Overcome the Dirks’ Test for Gifts to Relatives and Friends.The challenge for Salmanin the Supreme Court is that 33 years ago, in Dirks v. SEC, the Supreme Court stated that proof of insider trading liability requires proof that the insider benefited but that a gift to a relative or friend counts as such a benefit. The Court stated:
The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.
In the Salman oral argument, Justice Kagan, referring to the above quote from Dirks, stated that counsel for Salman was “asking us to ignore some extremely specific language in Dirks….” She stated, “You’re asking us to cut back significantly from something that we said several decades ago, something that Congress has shown no indication that it’s unhappy with, and in a context in which, I mean, obviously the integrity of the markets are a very important thing for this country.” Justice Kennedy added, “Dirks says there’s a benefit [to the insider] in making a gift….you certainly benefit from giving to your family.” Justice Breyer stated that very often “to help a close family member is like helping yourself.” Justice Sotomayor added, “Why is it any less culpable to give your close relative, who you’ve been supporting every month for your entire life, so instead of giving him…that regular one hundred dollar bill, you choose to give him corporate information.” No Justice expressed any inclination to narrow Dirks.
Salman’s Likely Inability to Persuade the Court on the Vagueness Issue. The Court also appeared unsympathetic to the argument by Salman’s counsel that because Congress had not defined insider trading, the Court should adopt a standard for insider trading liability narrower than the standard the Supreme Court articulated in Dirks. Justice Breyer said that Section 10(b) of the Securities Exchange Act, which is the principle basis for insider trading prosecutions, is analogous to the antitrust laws—“very vague statute. They’ve been around a long time. Exactly what’s criminal and what’s civil and so forth has been developed by courts over a long time. This statute’s been around since the ‘30s, and we have courts developing law in it.” He stated that the suggestion that the Court narrow Dirks “is really more likely to change the law that people have come to rely upon than it is to keep to it.” Justice Kagan added that there was reason “for caution in changing a 30-year-old rule that everybody has understood and lived by, and that—that Congress has shown no indication it’s unhappy with.” No justice expressed sympathy for the vagueness argument.
Concern by the Court Regarding the Government’s Efforts to Expand Dirks. On the other hand, the Court also appeared unsympathetic to the government’s efforts to expand Dirks to cover a gift to anyone, and not merely gifts to relatives and friends. Justice Alito stated to government counsel, “It doesn’t seem to me that your argument is much more consistent with Dirks than [the argument by Salman’s counsel].” He asked whether, under the government’s theory, giving information to a stranger on the street who looks sad is enough to confer a personal benefit on the insider. When counsel for the government stated it was and that the government was equating giving information without a corporate purpose to giving information for the insider’s personal benefit, Chief Justice Roberts stated, “This Court has not equated the two.” Justice Breyer asked how a gift to a stranger, as opposed to a relative or close friend, satisfied the requirement in Dirks that there be a personal benefit to the insider. And after receiving counsel’s explanation, Justice Breyer repeated, “So what is the personal advantage that you received?” And when counsel tried again, Justice Breyer again asked, “That is a personal advantage?” Justice Breyer added that the statement in Dirks that the elements of a violation exists when an insider makes a gift of confidential information to a trading relative or friend “doesn’t sound as if the writer of those words had in mind any person in the world.” He asked counsel if there were any circuit courts that had applied Dirks’ gift analysis beyond gifts to relatives and friends, and the best government counsel could do was point to a case that he acknowledged involved a gift to a close friend. Justice Breyer said, “I’m not worried so much about this case. I am worried about line drawing, and you want to draw a line so that friend, relative, doesn’t matter, and before I wrote those words, I’d like to know what circuit courts have followed that approach."
Apparent Support for a Narrow Affirmance. Following the discussion of the government’s effort to expand the Dirks gift standard beyond relatives and friends, Justice Kagan suggested that the Court not address the issue. She stated, “And things might look different if we had a case that was not a relative or friend. And why not separate out that strange, unusual, hardly-ever-prosecuted situation and say we’re not dealing with that here? We have nothing to say about it.” To which, the government’s counsel responded, “I’m fine with that.” Then, in response to Justice Sotomayor’s question about whether there was a difference between a friend and an acquaintance, government counsel stated:
[T]his case clearly doesn’t … implicate that at all….It’s one brother to another brother….The Court doesn’t have to deal with further outlier cases, and it doesn’t have to reconceptualize Dirks, or even interpret it in the way that I have synthesized its analysis….If the Court feels more comfortable given the facts of this case of reaffirming Dirks and saying that was the law in 1983, it remains the law today, that is completely fine with the government…..[I]f the Court is more at home with the language that was actually used in Dirks and wants to reaffirm it, it should do so.
The Importance of the Government’s Concession. The government’s concession that it would be satisfied if the Court affirmed Salman’s conviction simply by reaffirming Dirks, and not expanding or reinterpreting it as the government had urged in its briefs, is significant. If the Court follows that approach it could have the following consequences:
First, it would leave intact a reading of Dirks that absent a gift to a relative or friend, a tip by an insider is not actionable unless the government proves that the tipper benefitted from the tip.
Second, it would leave intact the Second Circuit’s statement in Newman that for someone to be deemed a “friend” under Dirks, they must have a “meaningfully close personal relationship” with the insider; friendships of a “casual or social” nature are not enough.
Third, it would leave intact the Second Circuit’s holding, again in Newman, that for tippee liability to arise in a criminal case, the tippee must have known that the insider tipped for the personal benefit of the insider. In Newman, the government had unsuccessfully argued against a requirement that the government prove that the tippee knew the insider tipped for a personal benefit, but in the Supreme Court government counsel acknowledged that in a case against a tippee for insider trading, the tippee “has to know [the information] came from an insider in breach of a fiduciary duty and for personal benefit.” (emphasis added)
Finally, it would leave intact in cases not involving tips to relatives and friends 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.” Even if the Supreme Court holds that is not a requirement in the case of a gift to a friend or relative, the standard could survive in the case of communications to persons other than friends and relatives.
Of course, we won’t know what the Court will do until it issues a decision some months from now. The Court could write an opinion that in describing Dirks provides a gloss that supports or undermines other aspects of the Second Circuit’s decision in Newman. From the oral argument, however, indications are that it will affirm Salman in a way that departs from Newman in one respect but leaves other important parts of Newman alone. The latter is good news for investment professionals, who derive substantial protection from both Dirks and Newman and who are likely to see most of that protection continue even after the decision in Salman.