Dec 07

Insider Trading and Brotherly Love at the Supreme Court

Yesterday, the Supreme Court of the United States decided Salman v. United States, wading into the “personal benefit” requirement necessary to establish criminal insider trading liability.  Justice Alito, writing for a unanimous Court, didn’t think the question presented was particularly difficult, stating that the Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), “easily resolves the narrow issue presented here.”  The result:  Salman’s insider trading conviction is affirmed – as we would say here in Philadelphia – on the basis of “brotherly love.”

We speculated about the Salman case when the Supreme Court granted certiorari back in January.  Salman, the remote-tippee, received and traded on information received from the brother (Michael) of a Citigroup investment banker-insider (Maher).  Maher testified that he provided the information to his brother Michael to “get him off his back,” although he also testified that he “loved him very much” and provided inside information to “help him” and to “fulfill whatever needs he had.”  Michael then provided the information to Salman, who traded on it.

At issue was the personal benefit to Maher.  Citing the Second Circuit’s opinion in United States v. Newman, another White Collar Alert favorite, Salman argued that Maher, the insider, gained “nothing” – or, at the very least, nothing that was “objective” or “consequential” or that represented “a potential gain of a pecuniary or similarly valuable nature.”

The Supreme Court held that there was no need for any such tangible benefit here because the tip was a gift from Maher to his brother.  The Court cited Dirks, which states that “the elements of fiduciary duty and exploitation of nonpublic information also exists when an insider makes a gift of confidential information to a trading relative or friend.” (Emphasis added in Salman).  With that, the Court concluded that “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 then confronted Newman, in which it had denied certiorari, noting that “to the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”  (Not surprisingly, Southern District of New York US Attorney Preet Bharara took to Twitter to laud that the Supreme Court for “unanimously and ‘easily’ reject[ing the] Second Circuit’s novel reinterpretation of insider trading law in US v. Newman.”).

But did the Court really reject Newman out of hand?  Maybe not.  The Court was careful to say, quoting Dirks, that, although Salman was in the heartland of Dirks, “it remains the case that ‘determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.’”  Justice Alito cautioned that there was “no need for us to address those difficult cases today,” perhaps leaving open those circumstances where the “personal benefit” line is not so clear in circumstances that do not resemble an episode of Family Ties.  In situations where insider Alex P. Keaton and sister Mallory are not so close – or where Alex is tipping information to his neighbor down the street – the question of what, exactly, is required to show “personal benefit” is still unresolved and thus leaves open questions – outside of a close family relationship – as to what, exactly, is the personal benefit necessary for an insider trading conviction.

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