SCOTUS Decides Highly-Anticipated Insider Trading Case, but Leaves Important Questions Unanswered
On December 6, 2016, the U.S. Supreme Court issued a decision in the long-awaited case of Salman v. United States, the first substantive insider trading case to be taken up by the high court in nearly two decades.
Although the Supreme Court has spoken, the uncertainty resulting from the 2014 decision of the U.S. Court of Appeals for the Second Circuit in United States v. Newman persists. Salman’s conviction was affirmed, but the Supreme Court’s holding in the case may in fact represent only a partial victory for the government. The Supreme Court did not pare back or even address the limitations on remote tippee liability that were established by the Second Circuit in Newman. Those limitations have severely hampered the ability of the Justice Department and the Securities and Exchange Commission to prosecute cases involving remote tippees in the Second Circuit and elsewhere over the past two years. Following the Salman decision, with the Supreme Court having expressly declined to fully repudiate Newman, it remains unclear when, if ever, the limitations on liability imposed by Newman will be scaled back or eliminated. Short of more definitive guidance in the form of Congressional legislation, we must continue to wait for answers to these important questions on a case-by-case basis which may very well differ from district to district. Of course, any future case that is addressed by the Supreme Court necessarily will be heard by different justices.
The Salman Case
The Salman case generated significant attention, because it was expected to resolve a perceived split of authority between the U.S. Courts of Appeals for the Second and Ninth Circuits. In December 2014, the Second Circuit dealt a significant blow to the government by overturning the convictions of portfolio managers Todd Newman and Anthony Chiasson, holding that a conviction for insider trading cannot be sustained unless it can be shown both that the tipper received a “personal benefit” in exchange for the information provided and that the tippee had knowledge that the tipper had received such a personal benefit. The Second Circuit also held that the existence of a personal benefit cannot be inferred unless there is “proof of a meaningfully close personal relationship” between the 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 Supreme Court reviewed the conviction of Bassam Yacoub Salman, who had received tips of confidential information from a friend and relative by marriage and made over $1.5 million trading on the tips. Salman had argued to the Court that, consistent with the Newman case, his conviction could not be sustained because it could not be shown that Salman’s tipper, Maher Kara, received a “personal benefit” by giving gifts of confidential information to Maher’s brother, Mounir Kara, who had then passed the tips to Salman, who was Maher’s brother-in-law. This argument had been rejected by the Ninth Circuit, in an opinion authored by Judge Jed Rakoff of the Southern District of New York (sitting by designation), disagreeing with the Newman decision in the Second Circuit where he normally sits. The Supreme Court agreed with Judge Rakoff and the Ninth Circuit, finding that the case presented a “narrow issue” that could be resolved merely by reference to its prior precedent, United States. v. Dirks. Applying the plain language of Dirks, the Supreme Court reaffirmed that a personal benefit can be inferred by a jury when the tipper “makes a gift of confidential information to a trading relative or friend.” Thus, Salman firmly establishes that where an insider makes a gift of information to a family member or friend with the intent that it will be used to trade, that action alone is sufficient to show a “personal benefit.” No further evidence of a substantive benefit to the tipper is required.
Perhaps because the tipper and tippee in Salman were close family members and it was undisputed that Salman knew of the benefit Maher Kara received, the Supreme Court did not reach certain of the difficult questions involving tippee liability that were the subject of significant controversy following the Second Circuit’s decision in Newman. For example, the Court offered no guidance as to the closeness of the familial relationship or friendship necessary to support a finding that a personal benefit was received in exchange for a gift of information. Additionally, the Court stated in a footnote that its decision “does not implicate” the portion of the Newman decision that mandated reversal of the defendants’ convictions because the government had “introduced no evidence that the defendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips.” The answers to those questions will have to await future cases.