U.S. Supreme Court Sides with Prosecutors and Partially Overrules Second Circuit Standard That Made It Harder to Prosecute Insider Trading

December 7, 2016

On December 6, 2016, the Supreme Court of the United States, in a unanimous decision, sided with prosecutors in a major insider trading case by concluding that a gift of material non-public information from an insider to a trading relative or friend, without any financial benefit in return, is a violation of securities laws. Salman v. United States, No. 15-628 (Dec. 6, 2016). The decision rejects the requirement of proof that insiders received a valuable personal benefit in exchange for inside information, which was an essential element under the U.S. Court of Appeals for the Second Circuit’s highly publicized decision in United States v. Newman, 773 F.3d 438 (2d Cir. Dec. 10, 2014).


In the 2014 Newman decision, the Second Circuit narrowed the scope of insider trading prosecutions by requiring that a tippee knew or should have known that the insider/tipper received a personal benefit for the tip and that to the extent that a personal benefit may be inferred from a personal relationship between the tipper and tippee, “the 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.” Newman, 773 F.3d at 452. The Newman standard made it harder to prosecute insider trading cases and resulted in certain noteworthy acquittals.

Last year, the U.S. Court of Appeals for the Ninth Circuit in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015) rejected Newman’s requirement of the exchange of a significant, potentially pecuniary personal benefit. In Salman, the government alleged an insider trading scheme involving members of an extended family. The tipper, who worked for an investment bank, allegedly provided confidential information to his brother about upcoming transactions involving the bank’s clients. It was further alleged that in so doing, the tipper knew that his brother would trade on the information. The brother then tipped Salman, whose sister had become engaged to and later married the tipper. The evidence at trial showed that Salman was aware of the close, mutually beneficial relationship between the tipper and his brother. The jury found Salman guilty of insider trading. Affirming the conviction, the Ninth Circuit rejected Newman’s requirement of a potentially pecuniary benefit, concluding that it was a departure “from the clear holding [of Dirks v. SEC, 463 U.S. 646 (1983)] that the element of breach of fiduciary duty is met where an ‘insider makes a gift of confidential information to a trading relative or friend.’ ”


The Supreme Court agreed with the Ninth Circuit, explaining that “Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative.’ ” Slip Op. at 9. Addressing Newman, the Supreme Court concluded that “[t]o 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.” Id. at 10 (citation omitted). However, the Supreme Court declined to address Newman’s other holding that the government must prove that traders knew or should have known, that the information they received was from an insider receiving a personal benefit. Id. at 5 n.1.


Although the Supreme Court observed that “‘[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts,” the Court was clear that Salman’s case is squarely covered by Dirks, partially overruling the Second Circuit’s holding in Newman. The decision represents a major victory for the United States Department of Justice and specifically the United States Attorney’s Office for the Southern District of New York, which hailed the decision in a press release as “common sense” and a “victory for fair markets and those who believe that the system should not be rigged.” We will continue to monitor this area of developing insider trading law.


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