Is That What Friends (and Family) Are For? Supreme Court Resolves Circuit Split in Insider Trading Case But Questions Remain
A recent Supreme Court decision provides new guidance in the area of insider trading liability without personal benefit, and resolves an existing split between the Ninth Circuit and Second Circuit Court of Appeals. In Salman v. United States, the District Court instructed the jury that the personal benefit requirement under Dirks v. U.S. Securities and Exchange Commission need not be a financial or tangible benefit. The Ninth Circuit affirmed holding that a pecuniary or tangible benefit was unnecessary and that a mere gift of confidential information could satisfy the personal benefit requirement. Recently, the Supreme Court affirmed the conviction.
The Salman decision represents a U-turn from the Court's refusal to hear the appeal of United States v. Newman, a Second Circuit Court of Appeals decision addressing whether insider trading liability can arise when a tipper makes a "gift" of confidential information to a trading friend or relative but receives no financial or other tangible benefit in return. In affirming the Ninth Circuit Court of Appeals, the Supreme Court in Salman unanimously reaffirmed the personal benefit requirement for insider trading requirement identified in Dirks v. SEC, and held that a gift of confidential information to a friend or family member may satisfy the personal benefit. At the same time, the Court rejected the Second Circuit Court of Appeals holding in Newman to the extent that it required a more substantial showing in the context of a gift to a friend or relative.
Key takeaways from the decision include:
More indictments and prosecutions may be pursued because the relative evidentiary burden for the prosecution has been made easier.
The pool of possible defendants and targets of investigations could be expanded.
Bassam Salman received information from his brother-in-law – who in turn had obtained information from his brother, an investment banker. Salman's brother-in-law had previously used information to execute trades for himself and provided that information to Salman, who also traded on the information. Both Salman and his brother-in-law testified at trial that they were close and that it was expected Salman would be trading on the information.
For its part, the Court determined that the facts in Salman fit easily within the Dirks framework. As the Court explained, "Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to a 'trading relative' and that rule is sufficient to resolve the case at hand." The Court noted that, to the extent the Second Circuit's holding in Newman required that the tipper receive something of a pecuniary or similarly valuable nature, it is inconsistent with Dirks and should be rejected. Nevertheless, the Court acknowledged that whether an insider personally benefits from a particular disclosure will not always be easy, but it found no difficulty in resolving the question presented in Salman because the case involved precisely the gift of confidential information to a trading relative that Dirks envisioned.
While Salman resolved the conflict between the Ninth Circuit and Second Circuit Courts of Appeals as to what type of showing the government must make in an insider trading case, the opinion leaves some uncertainty around the scope of the personal benefit requirement. The Court appeared to have narrowly limited its holding to tipping a friend or relative and declined to address more broadly the requirement outside of that specific context. Notably, the Court refused to adopt the government's argument that a gift of confidential information to anyone, not just a trading relative or friend, would be sufficient to satisfy the Dirks personal benefit requirement.
Additional questions that remain include:
What types of friendships or familial relationships may satisfy the trading requirements. Is an acquaintance enough? Is a shirttail relative enough? What about golfing partners?
How "close" any relationship must be, which will likely mean a case-by-case approach.
While a "gift" of material non-public information that is used by a friend or family member (even without a return of financial or other tangible benefit) is sufficient for liability under the securities laws, questions remain whether a disclosure for non-personal reasons (management disclosure to a securities analyst) will permit a similar inference of personal benefit.