In recent weeks amicus curiae briefs have been flooding into the U.S. Supreme Court in the case of Salman v. U.S., an appeal from the Ninth Circuit's decision in U.S. v. Salman, 792 F.3d 1087 (9th Cir. 2015). The Supreme Court's decision should clarify a split between the Ninth and Second Circuits on insider trading liability.
Basing its holding on Dirks v. SEC, 463 U.S. 646 (1983), the Ninth Circuit held that even if an insider does not receive a pecuniary gain or another quid pro quo benefit, he can still be liable if the disclosure of nonpublic information was intended to benefit a trading relative or friend. In Salman, an investment bank's employee, the tipper, provided confidential information about the bank's clients' upcoming transactions to his brother with the knowledge that his brother would trade on that information. The tipper testified that he provided this information because he "'love[d] [his] brother very much' and that he gave [his brother] the inside information in order to 'benefit him' and to 'fulfill[] whatever needs he had.'" The brother proceeded to pass on the information to the defendant, Salman, who also knew the tipper. The jury convicted Salman of insider trading, and the Ninth Circuit affirmed.
In Dirks, the Supreme Court held that tippee liability is dependent upon tipper liability. And, a tipper's liability depends on whether he has breached a fiduciary duty to his shareholders. The Dirks court stated the test for tipper liability simply as "whether the insider personally will benefit, directly or indirectly, from his disclosure." The tippee, in turn, is liable if he "knows or should know that there has been [such] a breach."
The Ninth Circuit determined that the tipper's gift of confidential information to the brother was sufficient for tipper liability under Dirks, and that Salman was in turn liable because he knew the source of the tip and could have inferred the employee's intent to benefit his brother.
While the Ninth Circuit found no need for a potential pecuniary gain or other valuable quid pro quo, the Second Circuit has construed tipper liability under Dirks more narrowly. In U.S. v Newman, the Second Circuit held that a personal relationship alone is insufficient for liability. 773 F.3d 438 (2d Cir. 2014), cert. denied, 136 S. Ct. 242 (2015). More is needed: there must be "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature."
The Supreme Court's determination of whether a close familial relationship is sufficient for insider tradition will be crucial in understanding liability going forward. Following the Ninth Circuit's interpretation of Dirks will certainly broaden the scope of liability, and may even, as the Cato Institute has argued in its amicus curiae brief, chill beneficial economic activity. Other amicus briefs have suggested that neither the Ninth nor the Second Circuit's rules are appropriate and seek to create a new analysis. Whatever analysis the Supreme Court choses, one thing is clear, a predictable framework is central to navigating the boundaries of information disclosure.
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