It has been nearly 20 years since the Supreme Court has spoken on the issue of insider trading. That will change this week when the Court ― in the highly anticipated case Salman v. United States involving tippee liability ― hears oral argument concerning the proof required to establish that an insider received a “personal benefit.”1 A circuit split has emerged in the last couple of years on the issue of the “personal benefit” requirement, first pronounced by the Supreme Court in Dirks v. S.E.C., 463 U.S. 646 (1983). The circuit split can be distilled as follows: to prove the existence of a “personal benefit,” must the Government supply evidence that an insider received a gain of a pecuniary or similarly valuable nature, or is it sufficient to show that the insider shared confidential information with a tippee who is a family member or friend?
The appeal before the Supreme Court this week stems from the Ninth Circuit’s decision in United States v. Salman. See 792 F.3d 1087 (9th Cir. 2015). In Salman, an insider, an investment banker in Citigroup’s healthcare group, provided information to his brother about “upcoming mergers and acquisitions of and by Citigroup clients.” Id. at 1089. The brother began trading on these tips and, in turn, shared this information with Salman who arranged for nearly identical trades to be executed on his behalf. See id. Salman, aware that the insider passed this information along to his brother, was found guilty of insider trading. See id. at 1089-90.
Salman challenged the sufficiency of the evidence before the Ninth Circuit, contending that the Government failed to prove that the insider received a “personal benefit” for sharing non-public information with his brother because there was no evidence that the insider received pecuniary or similarly valuable remuneration. See id. at 1093. Salman further argued that the “familial relationship” between the insider and his brother, by itself, was “insufficient to demonstrate that the [insider] received a benefit.” Id. The Ninth Circuit rejected Salman’s assertions on appeal. Citing Dirks, the Ninth Circuit held that the “personal benefit” requirement is defined broadly and can either be a direct benefit to the insider, such as “a pecuniary gain or reputational benefit that will translate into future earnings” (id. at 1092 (quoting Dirks, 463 U.S. at 663)), or an indirect benefit, such as “a gift of confidential information to a trading relative or friend.” (id. (quoting Dirks, 463 U.S. at 664)). Applying this standard, the Ninth Circuit affirmed Salman’s conviction, finding that the proof amply established that the insider provided “a gift of confidential information" to his brother. See id. at 1094.
In so holding, the Ninth Circuit declined to follow United States v. Newman, a 2014 decision issued by the Second Circuit, setting the stage for review of the “personal benefit” requirement by the Supreme Court. See 773 F.3d 438 (2d Cir. 2014). Newman involved two sets of insider-tippee relationships. In one case, the evidence demonstrated that the insider, an employee in the investor relations department at Dell, passed confidential information to a business school acquaintance who gave the insider professional advice as a matter of general courtesy. See 773 F.3d at 452. In the other case, the evidence showed that the insider, an employee in NVIDIA’s finance unit, shared inside information with a family friend who he occasionally socialized with and met through church. See id. at 452-53. Based, in part, on this proof, tippees further down the chain were convicted of insider trading.
The Second Circuit reversed these convictions, ruling that in both sets of tipping chains, there was insufficient evidence to establish that the insiders received a “personal benefit.” The court held, contrary to the Ninth Circuit, that the Government cannot prove the “personal benefit” element in tippee liability cases by presenting evidence of only “the mere fact of a friendship, particularly of a casual or social nature” between the insider and the tippee. Id. at 452. Although the Second Circuit did acknowledge that “a personal benefit may be inferred from a personal relationship between the tipper and the tippee,” the court stated that “such an inference is impermissible in the absence of 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.” Id. (emphasis added).
Law enforcement has been highly critical of the Second Circuit’s decision in Newman, lambasting that the court’s interpretation of the “personal benefit” requirement in Dirks is overly narrow and will have a chilling effect on insider trading prosecutions for tippee liability.2 The Ninth Circuit appears to share the concerns raised by law enforcement, observing that under Newman “a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.” Salman, 792 F.3d at 1094.
Given the opposing views of the Second and Ninth Circuits concerning what constitutes a “personal benefit” under Dirks, it is expected that the Supreme Court’s decision in Salman will provide essential clarity on this important issue. We will monitor Salman closely in the ensuing months.
1 Salman v. United States, No. 15-628. Oral argument is scheduled for October 5, 2016.
2 See, e.g., Evelyn Cheng, SEC’s White: Insider trading ruling ‘a concern’, CNBC (Dec. 11, 2014, 10:47 AM), http://www.cnbc.com/2014/12/11/secs-white-insider-trading-ruling-a-concern.html (SEC Chair Mary Jo White voices concern that the Second Circuit in Newman took “an overly narrow view of the insider trading law.”); Matt Turner, Sherriff of Wall Street: We’re no longer able to bring certain insider trading cases, BUS. INSIDER (Jan. 17, 2016, 4:45 PM), http://www.businessinsider.com/preet-bharara-on-newman-case-2016-1 (U.S. Attorney Preet Bharara expressing the view that under Newman it will be “very hard if not impossible to bring a certain kind of insider trading case” where an insider does not receive “something of pecuniary benefit back” from a relative or friend).