In recent years, courts have struggled with—and come to varying conclusions concerning—a fundamental issue regarding insider trading: what constitutes a “personal benefit” that if received by an insider or tipper can lead to liability? On December 6, 2016, in a highly anticipated decision, the Supreme Court issued a unanimous opinion in Salman v. United States upholding defendant Bassam Salman’s conviction for insider trading. The Court held that prosecutors could establish tipper liability, even if a tipper received no pecuniary benefit, where the tipper provided only a gift of material, nonpublic information to a trading relative or friend. In such circumstances, a gift would be sufficient to demonstrate that the insider received a “personal benefit” in breach of the insider’s fiduciary duty. In so ruling, the Supreme Court rejected the more restrictive view articulated in United States v. Newman, which had required prosecutors to prove that an insider, who “gifted” information to a trading relative or friend, also received “a pecuniary or similar benefit” in exchange for the tip. The Salman decision reaffirms the standard that existed prior to Newman, which the Court set decades ago in Dirks v. SEC.
The Supreme Court’s reasoning in Salman relied heavily on the language and standard established in Dirks, starting with the premise that, for a tippee to be liable for insider trading, the tipper must have breached a fiduciary duty. For the purposes of insider trading, however, a breach of fiduciary duty by an insider who discloses material, non-public information occurs only when the insider personally benefits from the disclosure. The Court emphasized that a tipper’s disclosure of inside information without a personal benefit is “not enough” to prove insider trading. Although some “objective” facts may demonstrate that the insider received a personal benefit (i.e., the receipt of pecuniary gain or a reputational benefit that will translate into future earnings), the Salman Court made clear that a gift of confidential information from an insider to a trading relative or friend can also satisfy the “personal benefit” requirement, because the tip and subsequent trade is the equivalent of an insider who trades on the information and then gives the proceeds to the relative or friend. Thus, according to the Court, “the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”
The Salman decision rejected Newman to the extent Newman required the government to prove that an insider who provided information to a trading relative or friend must also have received something of a “pecuniary or similarly valuable nature.” However, the facts of Salman and Newman were very different—Salman involved the sharing of information between family members and close friends while Newman involved tippees who were four or five steps removed from the original tippers. Left unanswered by the Salman decision is the type of personal benefit the government must show in Newman-like cases where the tippees are not “trading relatives or friends” of the tipper.