This week, the United States Supreme Court agreed to hear a case that could help to define what conduct constitutes insider trading and what level of proof the government must meet to successfully prosecute alleged insider trading violations. The Court’s announcement came as a surprise to many industry commentators—last October, the Court had declined to consider another case involving many of the same issues.
The issue centers on whether the government must prove that an investor knew his information came from a corporate insider who received a “tangible benefit” for passing along the tip.
In the current case, the Ninth US Circuit Court of Appeals, based in San Francisco, upheld the conviction of Bassam Salman, who received trading tips from his brother-in-law, a former investment banker. Mr. Salman was sentenced to three years in prison for trading on inside information. His brother-in-law had pleaded guilty in connection with the same activities at issue in the current case.
Mr. Salman’s defense counsel sought to rely upon the New York-based Second US Circuit Court of Appeals’ ruling in late 2014 that severely limited insider-trading prosecutions. In that case, United States v. Newman, the court held that two hedge fund managers could not be convicted of insider trading unless it could be shown that they knew the original source of the information had received a concrete benefit. Mr. Salman argued that evidence of a family relationship between the tipper and the tippee was not enough to demonstrate that the insider passing along the tip received a tangible personal benefit. The Ninth Circuit rejected that argument in its ruling last July, and Mr. Salman has been serving his prison sentence since August 2014.
Presumably, in agreeing to consider the issue, the Supreme Court will clarify what is considered to be a personal or tangible benefit to sustain an allegation of insider trading against a person receiving non-public information from such a tipper. Of course, it also is possible that the Court will rule narrowly, based on the specific facts of the case, and will not meaningfully resolve the confusion of what constitutes a personal benefit. In the current case, the government argued that Mr. Salman “knew full well” that his brother-in-law was providing the information as a gift to him - that he provided the information because it would be personally beneficial.
Prosecutors have said that the Newman ruling significantly hampered their ability to pursue some insider trading cases by narrowly defining what constituted a benefit to the tipper. By finding that mere “friendship” or the exchange of career advice was not enough to constitute a personal benefit, the government only could pursue investigations in which it could demonstrate that the tippees knew their friend or relative would receive an explicit, specific, consequential gift or benefit as a direct result of receiving the confidential information.
If the US Supreme Court rules in favor of Mr. Salman, or declines to elaborate on what constitutes a personal benefit, it may essentially be sanctioning the sharing of inside information among friends and relatives. Certainly such a result will make it even more difficult for the Justice Department to prosecute alleged insider trading violations.