In its first insider trading case in nearly twenty years, the U.S. Supreme Court on Tuesday unanimously upheld a Chicago man’s conviction under a tippee liability theory based on information he obtained from relatives that netted him over $1.5 million in profits. Salman v. United States, 580 U.S. __ (2016). In an opinion written by Justice Samuel Alito, the Supreme Court, relying on Dirks v. SEC, 463 U.S. 646 (1983), held that a prosecution for insider trading can be sustained where there is evidence that the tipper provided inside information to a relative or friend―even if the tipper did not receive a monetary or pecuniary benefit. The Supreme Court reasoned, “[i]n such situations, 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.” Salman, 580 U.S. at __. The Supreme Court’s ruling rejected arguments by defendant Bassam Salman, who was convicted of trading on information originally received from his brother-in-law, an investment banker at Citigroup. Salman contended that evidence of a familial relationship between the tipper and tip recipient was not enough to support a conviction.
The decision resolves a circuit split between the Ninth and Second Circuits, effectively overturning the portion of the Second Circuit’s decision in United States v. Newman holding that prosecutors must prove that insiders received a significant, potentially pecuniary personal benefit in exchange for disclosing tips in order to convict traders who acted on inside information.1 See 773 F.3d 438 (2d Cir. 2014); United States v. Salman, 792 F.3d 1087 (9th Cir. 2015).
The appeal before the Supreme Court stemmed from the Ninth Circuit’s decision in Salman. See 792 F.3d 1087. In Salman, an investment banker in Citigroup’s healthcare group provided information to his older brother about “upcoming mergers and acquisitions of and by Citigroup clients.” Id. at 1089. The older 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 the Second Circuit’s decision in Newman, setting the stage for review of the “personal benefit” requirement by the Supreme Court. 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 whom 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 prove to establish that the insiders received a “personal benefit.” The court held, contrary to the Ninth Circuit, that 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).
Future Implications for Insider Trading Cases
The Supreme Court’s rejection of the Second Circuit’s heightened pecuniary benefit requirement, which was perceived by law enforcement as a blow to its ability to aggressively prosecute insider trading cases, has already been lauded by many government officials. For example, Preet Bharara, the U.S. Attorney for the Southern District of New York, who plans to remain as U.S. Attorney in the Trump administration, praised the ruling as “a victory for fair markets and those who believe that the system should not be rigged.” In light of Tuesday's decision in Salman, we anticipate that law enforcement, particularly in the jurisdiction of the Second Circuit, will actively pursue cases it felt it could not previously prosecute under Newman.
The Supreme Court’s narrow ruling in Salman, however, does leave open the question, addressed in Newman, whether a tippee must know that the insider received a personal benefit in order to be found guilty of insider trading. Although the Second Circuit has answered this question in the affirmative, we expect this issue to be litigated in other jurisdictions, possibly setting the stage for further review in the right case by the Supreme Court. We will continue to closely monitor DOJ and SEC enforcement matters related to insider-trading.
1 The convictions in Newman were also reversed on the ground that there was “no evidence that the defendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips.” Salman, 580 U.S. at __ n. 1. The Supreme Court, in a footnote, observed that these issues were not implicated in this case. Id.