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Supreme Court Confirms Rule on Insider Trading Involving Tips of Confidential Information to Friends and Relatives

On December 6, 2016, the U.S. Supreme Court issued its opinion in Salman v. United States, upholding the Ninth Circuit Court of Appeals’ affirmation of the conviction of Bassam Salman for insider trading.

In its 1983 ruling in Dirks v. SEC, the Supreme Court held that (1) a person who trades on insider information received in a tip hinges on whether the tipper’s disclosure breaches a fiduciary duty of the tipper, which occurs when the tipper discloses the information for a personal benefit; and (2) a personal 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.

The Second Circuit Court of Appeals (which includes New York) decided in 2014 that the mere fact of a tip from an insider to a friend or relative does not automatically meet the “personal benefit” test, unless there is “proof of a meaningfully close personal relationship” between tipper and tippee “that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

In Salman, the Ninth Circuit Court of Appeals declined to follow the Second Circuit and held that simply because the case involved “a gift of confidential information to a trading relative,” the “personal benefit” test was met and no further proof of gain to the tipper was needed.

To resolve the split between circuits, the Supreme Court held that the Ninth Circuit properly applied Dirks to affirm Salman’s conviction. The Supreme Court said to the extent the Second Circuit had held that the tipper must receive something of a pecuniary or similarly valuable nature in exchange for a gift to a trading relative, that rule was inconsistent with Dirks.

The ruling was an important victory for government prosecutors. Based on the 2014 Newman ruling, prosecutors in New York had dropped a number of insider trading charges due to the additional proof of financial benefit required.

©2022 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume VI, Number 343
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About this Author

Joshua Erekson, Michael Best Law Firm, Corporate Law Attorney
Senior Counsel

As senior counsel, Josh advises clients in all realms of corporate law, including federal and state securities law compliance, the formation and financing of start-up businesses, and mergers and acquisitions.

Prior to joining the firm, Josh served as corporate counsel at Huntsman Corporation, where his practice focused on SEC regulatory compliance and general corporate legal matters. He was also a lawyer at two California-based firms, where he represented private and public companies in general corporate matters such as formation, capitalization...

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Michael H. Altman, transactional lawyer, corporate mergers attorney, Milwaukee Law firm
Partner

Clients across multiple industries turn to Michael to coordinate their more complex business transactions. They value his quick assessment of issues and their implications, as well as his creative yet effective solutions to the many issues that arise during the course of a transaction.

Michael’s practice focuses on mergers and acquisitions, buyout transactions, securities regulation, and venture capital investment transactions. Both buyers and sellers, as well as issuers and shareholders, benefit from Michael’s counsel. Michael maintains a diverse business law practice, which...

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