On 6 December 2016, in Salman v. United States, the US Supreme Court ("Court") affirmed the insider trading conviction of a defendant who traded on inside information after receiving it from his brother-in-law, who, in turn, had received it from his brother, the original tipper. The Court held unanimously that the narrow issue presented by the fact that the inside information was originally tipped between close relatives was "easily resolve[d]" by the Supreme Court's 1983 decision in Dirks v. S.E.C. The Court, however, declined to address other aspects of insider trading law that went beyond the facts presented in this case.
The defendant in Salman received confidential information about pending mergers and acquisitions from his brother-in-law (the brother of the original tipper). That original tipper had access to the inside information in his role as an investment banker. The evidence showed that the two brothers had a very close relationship. The tipper provided the inside information to benefit his brother and expected that his brother would trade on it. In addition, the defendant's brother-in-law told the defendant that the information originated with his brother.
The transmittal of confidential information constitutes insider trading only if the original tipper receives a personal benefit in exchange for providing the information. The Court determined that this requirement was met here because Dirks held that the personal benefit requirement is satisfied when a tipper "makes a gift of confidential information to a trading relative or friend". To bolster this conclusion, the Court explained that, just as it would be illegal for an individual with inside information to trade on that information and give the proceeds to a relative or close friend as a gift, it is illegal to pass along the inside information as a gift so that the relative or close friend can trade on it. The Court noted that it might sometimes be difficult to determine whether a tipper receives a benefit by providing a gift of inside information without any monetary benefit in return. But this was not such a case. Because the original tip was made to the tipper's brother (with whom he had a close personal relationship), this scenario fell "in the heartland of Dirks's rule concerning gifts".
Because this case was easily resolved based on the family relationship between tipper and tippee, the Court did not address the standard that the federal appeals court in New York recently articulated in United States v. Newman (which we have written about in a previous edition of this newsletter) for determining when a benefit exists in other scenarios. In addition, the Court did not address Newman's holding that a remote tippee—i.e., a defendant (such as the defendant in both Salman and Newman) who receives inside information from intermediaries rather than from the original tipper—must know that the original tipper received a personal benefit. While the Supreme Court's decision in Salman now makes clear that a gift of inside information to a relative or close friend by its very nature constitutes a personal benefit to the tipper, the decision leaves intact the holdings of Newman (at least within the jurisdiction of the Newman court), which the Court did not address here.
Our client note, which discusses this case in further detail, is available at: http://www.shearman.com/en/newsinsights/publications/2016/12/supreme-court-pecuniary-benefit-not-required
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