Blog-image-insider-trading

On December 6, 2016, after nearly twenty years of silence on insider trading, the U.S. Supreme Court unanimously affirmed the Ninth Circuit in holding that prosecutors need not show that a tipster received a pecuniary or other tangible benefit for providing inside information where the insider and trader are close friends or relatives. Salman v. United States, U.S. Supreme Court Case No. 15-628.

Salman was convicted for trading on information received from his friend, Michael Kara, who had in turn received the information from his brother and Salman’s brother-in-law, Maher Kara, a former Citigroup investment banker. Although Salman was not the insider, he was convicted based on so-called “tippee liability,” where the insider discloses nonpublic information to an outsider (a “tippee”) who then trades on the basis of the information, as established by the Supreme Court in its landmark Dirks decision. Dirks v. S.E.C., 463 U.S. 646 (1983).  Under Dirks, a tippee can be liable for insider trading provided the insider received a “personal benefit” from tipping the information, which benefit may be inferred where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.”

While Salman’s appeal was pending in the Ninth Circuit, the Second Circuit issued its Newman decision, reversing the convictions of two portfolio managers for insider trading. United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied.  In Newman, the Second Circuit acknowledged that Dirks allowed a personal benefit to be inferred, but held that the inference could only be drawn with “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

On appeal, Salman urged the Ninth Circuit to follow Newman. Salman argued that he could not be liable under Dirks because his brother-in-law did not receive money or property in exchange for the information and therefore did not receive a personal benefit.  The Court of Appeals disagreed, holding that Dirks allowed the jury to infer that the tipper had received a benefit because he conveyed confidential information to a trading relative.

The U.S. Supreme Court’s unanimous decision, authored by Justice Samuel Alito, resolves this circuit split, effectively overturning Newman. The Court held that “[Salman’s] conduct is in the heartland of Dirks’ rule concerning gifts of confidential information to trading relatives,” and that “to the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’” in exchange for gifted information, such a requirement “is inconsistent with Dirks.”   The Court noted that “[m]aking a gift of inside information to a relative like Michael is little different from trading on the information, obtaining the profits, and doling them out to the trading relative. The tipper benefits either way.”