In United States v. Salman, the Supreme Court held 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 passed on the tip. This decision partially overrules U.S. v. Newman, a much-publicized 2014 decision by the Second Circuit that required proof of a pecuniary benefit to the tipper to establish insider trading liability.
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 of the breach.
In a memorandum on the case, Cadwalader attorneys conclude that Salman disposes of the Newman requirement to show a pecuniary benefit to the tipper, but does not change the requirement – also articulated in Newman – that the tippee knows of some benefit to the tipper who shared inside information. This decision also reaffirms the continuing validity of the Supreme Court's seminal 1983 decision, Dirks v. SEC.
The Cadwalader memorandum was authored by Jodi Avergun, Douglas Fischer, Jason Halper, Alexander Hokenson and Joseph Moreno.
Commentary / Jodi Avergun
Friends and relatives of corporate insiders who knowingly receive and trade on inside information now face greater exposure for federal securities laws violations.
It remains unclear, however, 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? Where the relationship between tipper and tippee is more attenuated, what additional evidence is necessary to infer properly 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 receding in the rearview mirror, the Salman ruling will support the government's efforts to prosecute remote tippee insider-trading cases.
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