United States: The Supreme Court Restores Implied Benefit Theory In Insider Trading Prosecutions Of Downstream Tippees

Friends and relatives of corporate insiders who knowingly receive and trade on inside information now confront greater exposure for federal securities laws violations.  On December 6, 2016, the Supreme Court held in United States v. Salman that "tippees" who trade on material non-public information may be found criminally liable even when there is no evidence of a pecuniary or tangible benefit to the insider who tipped.1  This decision partially overrules U.S. v. Newman, a much-publicized 2014 Second Circuit decision that required proof of a pecuniary benefit to the tipper for insider trading liability to attach.2  While Salman disposes of Newman's requirement to show a pecuniary benefit to the tipper, it leaves unchanged the requirement, also articulated in Newman, that tippees know of some benefit to the tipper who shared inside information.  The decision also re-affirmed the continuing validity of the Supreme Court's seminal 1983 decision, Dirks v. SEC.3


Liability for insider trading is based upon an insider's breach of a duty to the owner of material non-public information.  When the insider improperly tips that information to a non-insider, the tippee effectively becomes a party to the insider's breach of duty if the tippee knows or should know that there has been a breach of duty.4  In Dirks v. SEC, the Supreme Court explained that the test for determining if there has been a breach "is whether the insider personally will benefit, directly or indirectly, from his disclosure."5  Thus, the Court in Dirks held that "[n]ot only are insiders forbidden by their fiduciary relationship [to the corporation's shareholders] from personally using undisclosed corporate information to their advantage, but they also may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain."6  

Although a tipper's personal gain is clearest when he or she receives a pecuniary benefit for providing inside information, the Court in Dirks explained that a personal benefit can be inferred where there is a "gift" of inside information to a close relative or friend, or where there is a "relationship between the insider and the recipient that suggests a quid pro quo from the latter."  As a result, cases against tippees since then have often been premised on evidence of a friendship or a familial relationship between the tipper and tippee.7

In December 2014, the U.S. Court of Appeals for the Second Circuit issued United States v. Newman, which significantly pared back the scope of tippee liability and the common interpretation of Dirks.8  The Second Circuit reversed the convictions of two tippees holding that, to the extent that Dirks permitted the inference of a personal benefit due to a familial or social relationship between the tipper and tippee, "such an 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."9  The Second Circuit further explained that, while the "ephemeral" value of the friendship between the tipper and tippee will not suffice to establish the necessary personal benefit to the tipper, the government also need not prove that the tipping resulted in immediate pecuniary gain. 10

The Second Circuit's holding in Newman had an immediate and substantial impact in the Southern District of New York and elsewhere.  Criminal defendants sought to withdraw guilty pleas and prosecutors dropped cases against tippees.11  In perhaps the most high-profile example, Preet Bharara, U.S. Attorney for the Southern District of New York, dropped cases against seven employees of SAC Capital Advisors, six of whom had already pleaded guilty.  Indeed, following the Newman ruling in December 2014, the office did not secure an insider trading conviction until August 2016.12

United States v. Salman

In United States v. Salman, the evidence at trial showed that the defendant, Bassam Salman, traded on material, nonpublic information he obtained through a chain of tips originating with his brother-in-law, an investment banker.13  That banker shared confidential information about certain mergers and acquisitions with his brother, who then shared this information with his brother-in-law, the defendant Salman, and encouraged Salman to trade on the information.14  The original tipper received nothing of pecuniary value in return from his brother for providing the tip, but, on one occasion, gave the information in lieu of a cash gift.  The tipper also wanted his brother to stop "pestering" him.  Salman was a remote tippee in the arrangement, but knew that the investment banker tipper was providing the confidential information to his brother.

Salman appealed his conviction to the Ninth Circuit, arguing that, in light of Newman, the government's evidence regarding the relationship between the brothers was insufficient for a jury to find that the tipper disclosed the inside information to his brother in exchange for a personal benefit.  The Ninth Circuit, however—in an opinion authored by Judge Jed Rakoff of the Southern District of New York sitting by designation—upheld Salman's conviction, explaining that, under Dirks, liability may exist where the "insider makes a gift of confidential information to a trading relative or friend."15  The Ninth Circuit thereby disagreed with Newman's holding that insider trading liability requires proof of "tangible" gain to the tipper.16

The Supreme Court's Ruling

The Supreme Court affirmed, finding that Dirks "easily resolve[d]" the "narrow issue presented."17  Writing for the Court, Justice Alito explained 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."18  The Court reasoned that the tipper personally benefitted from gifting his brother inside information because the result was no different than if the tipper had made the trade himself and made a direct gift of the resulting proceeds to the tippee.19  To illustrate its point, the Court observed that, in one instance, the tippee declined an offer of money from his brother, instead requesting "lucrative trading information."

The Court flatly rejected Salman's argument that it should adopt Newman's requirement that prosecutors prove that a tipper received a pecuniary gain.  Justice Alito declared that Newman's requirement to show pecuniary benefit to the tipper was "inconsistent with Dirks."20  Other than its reliance on the precedent of Dirks, the Court did not elaborate on its reasoning for declining to adopt Newman's requirement of a pecuniary gain.  The Court also rejected Salman's argument that Newman's requirement to prove a pecuniary gain was necessary to ensure that insider trading liability is not "indeterminate and overbroad."

Importantly, the Salman decision leaves intact Newman's requirements that a defendant must know the information originated from an insider, and that the insider received a benefit in exchange for the tip.  The Court explained that Salman "did not implicate those issues."21  Accordingly, going forward, the government must still prove these facts to establish insider trading on the part of a remote tippee, at least in the Second Circuit. 

The Court concluded its decision by agreeing with Dirks' proclamation that "[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts."  However, the Court continued, "there is no need for us to address those difficult cases today because this case involves "precisely the gift of confidential information to a trading relative that Dirks envisioned."22


Although the Court's unanimous ruling in Salman will aid the government's prosecutions of insider trading cases involving remote tippees, the ruling still leaves open several issues concerning the scope of tippees' liability.  It remains unclear how close a personal relationship must be for a court to infer a benefit to the tipper.  For example, does a tip given to a casual acquaintance qualify as a gift of inside information under Dirks and Salman, and therefore establish a personal benefit to the tipper?  And where the relationship between tipper and tippee is more attenuated, what additional evidence is necessary to properly infer a personal benefit to the tipper?  Regardless of how courts answer these questions, Salman does not relieve the government of its burden to prove that the insider received a benefit in exchange for the tip.

With one key element of Newman now in the rearview mirror, the Salman ruling will support the government's efforts to prosecute remote tippee insider trading cases.  This is particularly the case in the Second Circuit where, as discussed above, insider trading prosecutions had been hampered.  Indeed, both Preet Bharara and the outgoing Chair of the Securities and Exchange Commission, Mary Jo White, have lauded the decision.  Bharara praised the decision as a victory for fair markets by affirming the government's position that "the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public."23  Chair White stated that the ruling "reaffirms our ability to continue to aggressively pursue illegal insider trading and bring wrongdoers to justice."


1   Salman v. United States, No. 15-628 (U.S. Dec. 6, 2016), available at https://www.supremecourt.gov/opinions/16pdf/15-628_m6ho.pdf.

2   773 F.3d 438 (2d Cir. 2014).

3   463 U.S. 646 (1983).

4   Id. at 660.

5   Id. at 662.

6   Id. at 659 (emphasis added).

7   See, e.g., United States v. Newman, 773 F.3d 438, 451-52 (2d Cir. 2014); United States v. Salman, 792 F.3d 1087, 1089  (9th Cir. 2015).

8   773 F.3d 438.

9   Id.

10 Id. at 452-53.

11 See, e.g., United States v. Conradt, No. 12-887, 2015 U.S. Dist. LEXIS 16263, at *2-3 (S.D.N.Y. Jan. 22, 2015).  The defendants in Conradt successfully moved to withdraw their guilty pleas after arguing that the government's indictment contained no obvious allegations that the tipper who provided the inside information received a benefit for that disclosure.  The government then dropped the charges against those defendants.

12 See United States v. Stewart, No. 15-cr-287 (Aug. 17, 2016).  In contrast, from 2009 through 2013, the U.S. Attorney's office for the Southern District of New York enjoyed a perfect trial record in insider trading cases.

13 792 F.3d at 1094.

14 Id. at 1089-90.

15 Id. at 1093.

16 Id. at 1093-94.

17 Salman v. United States, No. 15-628 at 8.

18 Id. at 9.

19 Id. at 10.

20 Id.

21 Id. at fn 1.

22 Id. at 12.

23 U.S. Dep't of Justice, Statement of U.S. Attorney Preet Bharara on the Supreme Court's Decision in Salman v. U.S. (Dec. 6, 2016), available at https://www.justice.gov/usao-sdny/pr/statement-us-attorney-preet-bharara-supreme-court-s-decision-salman-v-us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions