On December 6, 2016, a unanimous Supreme Court held in Salman v. United States, No. 15-628, slip op. (Dec. 6, 2016) that a tipper’s gift of confidential inside information to his brother constituted a sufficient personal benefit to uphold an insider trading conviction of the brother’s friend. In so holding, the Court confirmed that the government need not prove that an insider received a tangible pecuniary benefit in exchange for tipping inside information, to obtain a conviction.
In a significant victory for the government, the Salman decision rejected any interpretation of the Second Circuit’s much-hyped decision in United States v. Newman, 773 F.3d 438 (2014), that would have required proof that an insider received something of tangible value in exchange for the confidential inside information to establish criminal or civil liability. Instead, the Court adhered to its 1983 decision in Dirks v. SEC, 463 U.S. 646 (1983), which concluded that a tippee’s liability for insider trading “hinges on whether the tipper breached a fiduciary duty by disclosing the information,” and that a breach can only occur “when the tipper discloses the inside information for a personal benefit.” Salman, slip op. at 2. The Dirks Court also noted that jurors could infer a “personal benefit” when the insider either receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” Id. (quoting Dirks). In sustaining Salman’s conviction, the Court reiterated that “Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to a ‘trading relative,’” and in those circumstances, “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.” Id. at 10.
Importantly, while the Salman decision is undoubtedly a boost to the government’s insider trading enforcement regime, the Supreme Court declined to adopt the government’s argument that any disclosure of insider information for a non-corporate purpose is enough to satisfy the personal benefit requirement—flatly stating that “the disclosure of confidential information without personal benefit is not enough.” Id. at 8. Accordingly, it appears as though the Court’s first insider trading case in two decades will result in federal district and appellate courts continuing to grapple with the particular facts of each case to determine whether a tipper’s “personal benefit” has been sufficiently established by the government.
James R. Wyrsch is president of Wyrsch Hobbs & Mirakian in Kansas City, Missouri.