On December 6, 2016, the U.S. Supreme Court issued its long-awaited ruling in Salman v. United States. In a unanimous opinion, the Supreme Court adhered to its 1983 decision in Dirks v. SEC, 463 U.S. 646, and held that a tippee is liable for trading on inside information when the tipper "personally will benefit directly, or indirectly, from his disclosure." The Supreme Court in Salman agreed with the Ninth Circuit's interpretation of Dirks, holding that the tipper "personally benefitted from making a gift of confidential information to a trading relative." In such a situation, the Court found a tipper benefits personally because his gift of trading information to a relative or friend is equivalent to if he traded on the information himself and gifted the proceeds. This ruling will likely serve to increase federal insider trading prosecutions, specifically where the insider has not received a tangible monetary or pecuniary benefit as a quid pro quo for sharing inside information with a friend or relative.
Salmon addressed the circuit split that has been plaguing insider trading jurisprudence since the Second Circuit's 2014 ruling in United States v. Newman, 773 F.3d 438, which we wrote about here. Specifically, the Salman Court rejected as inconsistent with Dirks the Second Circuit's finding that liability depends upon the tipper having received something of a "pecuniary or similarly valuable nature" in exchange for a gift to a trading relative; however, the Salman decision did not implicate the portion of the Newman opinion requiring evidence of the tippee's knowledge that the information on which they traded "came from insiders or insiders received a personal benefit in exchange for the tips."
The Salman decision walks back some of the significant advantages that the Second Circuit's Newman opinion conferred on insider trading defendants. By reasserting its decision in Dirks that a jury may infer that a tipper personally benefits from providing a gift of non-public information to a trading relative, the Court has lifted the burden on prosecutors to prove that a tipper has received a tangible pecuniary benefit in exchange for relaying confidential information. This will likely have a significant effect on insider trading defenses for all tippees where there is no obvious or tangible pecuniary gain to the tipper.
This article is presented for informational purposes only and is not intended to constitute legal advice.
