In a major decision rendered on December 6, 2016, Salman v. United States, the U.S. Supreme Court provided further clarity to the elements of insider trading violations. It followed a Ninth Circuit decision and unanimously rejected the holding by the Second Circuit Court of Appeals in United States v. Newman, which proscribed the long-standing basis of Dirks v. SEC.
In Dirks, the Supreme Court held that a “tippee” was liable if such person acts on information disclosed by a “tipper” for the latter’s “personal benefit” in breach of a fiduciary duty – a duty of trust and confidence not to exploit that information for a personal advantage. A personal advantage may be inferred where the tipper receives something of value in exchange for the tip or makes a gift of confidential information to a relative or friend that trades securities in response to that information. In the Newman decision, the Second Circuit stated that for such “gift” to infer a personal benefit to the tipper there must be proof of (i) a “meaningfully close personal relationship” with the tippee that is (ii) objective, (iii) consequential, and (iv) “represents at least a potential gain of a pecuniary or similarly valuable nature.” It is the latter element that the Supreme Court rejects in Salman.
The Supreme Court held that the Ninth Circuit correctly applied Dirks and allowed the lower court jury to infer that the petitioner knew that his inside information resulted from his brother-in-law and friend’s breach of a fiduciary duty, exhibited by a “gift of confidential information to a trading relative” with a personal benefit in the process. Unlike the analysis in Newman, the Supreme Court held that prosecutors are not required to prove that the tipper received something of a “pecuniary or similarly valuable nature.” In his opinion, Justice Alito wrote that “a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds.” Although this opinion appears to focus on “trading relatives” (which, under the facts of this case, involved a chain of tips from a brother to a brother to a brother-in-law), its reference to the words in Dirks that personal benefits can be derived from gifts of confidential information to a “trading relative or friend” confirms that proof of a friendship (a “meaningfully close, personal relationship”) between a tipper and a tippee, without the tipper’s economic gain, can result in a conviction. The result is that Bassam Salman, sentenced in April 2014 to three years in prison, was guilty of conspiracy and securities fraud.