On 6 December 2016, the Supreme Court handed down a unanimous insider trading decision reaffirming the applicability of Dirks v. SEC in assessing the liability of a tippee. In Salman v. U.S., the Court held that the tipping of insider information to a family member who trades on that information is sufficient to establish a "personal benefit" for the tipper such that liability can be imposed on the trading family member. Other key takeaways:
- The Court overturned that part of the Second Circuit's decision in U.S. v. Newman that held that the tipper must receive a personal benefit of pecuniary or similarly valuable nature in a case in which the tipper and tippee are family members or close friends.
- Newman's analysis of what constitutes a "meaningfully close personal friendship" was not addressed by the Court and remains undisturbed in the Second Circuit.
- Any "chilling" effect of the pecuniary benefit requirement of Newman on SEC and DOJ insider trading cases has been ameliorated, and we expect to see the recent aggressive enforcement of insider trading laws continue unabated.
The facts in the Salman case were straightforward. Maher Kara was an investment banker who had access to highly confidential information about mergers and acquisitions involving his employer’s clients. Over a period of three years, he provided his brother, Michael, with inside information about mergers and acquisitions in order to help his brother. Michael traded on the information from Maher and made profits therefrom. Michael, in turn, shared the tips he received with Maher’s brother-in-law, Salman. Salman, knowing the information had come from Maher, traded on the tips and made more than $1.5 million in profits. Salman was convicted of several counts of conspiracy to commit securities fraud and securities fraud in the form of insider trading.
Ninth Circuit Ruling
During the pendency of Salman’s appeal to the Ninth Circuit, the Second Circuit issued its decision in Newman. In that case, which involved remote tippees who were unrelated to the original tipper, the court held that a tipper can be inferred to have received a "personal benefit" from a tip to a family member or friend if the tip was (1) to a meaningfully close personal relationship, that (2) resulted in an "exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." The court further held that the government was required to prove that the tippees knew the information on which they traded came from insiders that received a personal benefit in exchange for the tips. Because the Newman court found insufficient evidence of the foregoing factors, the court overturned the convictions of the remote tippees.
Salman, relying on Newman, argued that his conviction, likewise, should be overturned because there was no evidence that Maher received anything of "pecuniary or similarly valuable nature" in exchange for the tips he made to his brother. The Ninth Circuit rejected this argument, finding that, under the Supreme Court’s decision in Dirks v. SEC, the mere tipping of inside information from one family member to another who trades is sufficient to establish a "personal benefit" for purposes of insider trading liability, thereby creating a split with the Second Circuit.
The Supreme Court’s Unanimous Decision
The Court agreed to review the single, narrow issue in Salman, i.e., whether a close family relationship shared by an insider and a tippee is sufficient to establish a personal benefit necessary to establish insider trading. Ultimately, the Court answered that question in the affirmative.
The Supreme Court’s decision focused on the language of Dirks, which held that a tippee’s liability for insider trading hinges on whether the tipper had breached a fiduciary duty by disclosing the information. In turn, Dirks noted that a tipper breaches his fiduciary duty if he disclosed inside information in exchange for a "personal benefit." Most importantly, Dirks held that a jury could infer a personal benefit when a tipper makes a gift of confidential information to a "trading relative or friend."
Relying on the foregoing, the Salman Court held that, because Maher disclosed the confidential information to his brother Michael as a gift, and with the expectation that he would trade on it, Maher clearly breached his fiduciary duty. In turn, the Court found that Salman, as a tippee, acquired that duty and breached it himself by trading on the same information "with full knowledge that it had been improperly disclosed." The Court expressly disapproved of any requirement, to the extent Newman intended there to be one, that a tipper must "also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends," finding any such requirement inconsistent with its holding in Dirks. Accordingly, the Court upheld the Ninth Circuit’s judgment and affirmed Salman’s convictions.
The Court was unwilling to revise the Supreme Court precedent established by Dirks, which is not surprising in light of the fact pattern the Salman case presented. While the portion of the Newman decision that required something more than a familial relationship or friendship to establish a personal benefit can no longer be relied upon, other aspects of Newman remain untouched.
For example, the Supreme Court highlighted, in a footnote, the fact that no evidence had been introduced in Newman that the remote tippees knew that the information on which they traded originated from insiders or that those insiders had received any personal benefit from the tips. While the Court noted that the facts at hand did not "implicate those issues," the Court also stated that Salman himself knew that Maher had been the originator of the "gift."
The tipper and remote tippee in Newman were not family members. There, the court analyzed the facts required to establish the "friend" component of the Dirks inference in the context of a non-familial relationship. Because that fact pattern was not present in Salman, Newman’s requirement and analysis related thereto of a "meaningfully close personal relationship" was not addressed by the Court and remains undisturbed.