Yesterday, the United States Supreme Court issued a unanimous, but narrow, ruling in Salman v. United States,^[1] regarding criminal tipper/tippee liability for insider trading, which the Supreme Court had not significantly addressed since its decision in Dirks v. United States in 1983.^[2] Following Dirks’ holding that a tippee cannot be held liable for insider trading unless the tipper receives a “personal benefit,” the Supreme Court ruled in Salman that a jury can infer that an insider receives an inherent personal benefit when making a gift of confidential information to a relative who trades on that information. The Court declined to adopt the Government’s argument that “a gift of confidential information to anyone, not just a ‘trading relative or friend,’ is enough” to establish liability, and noted that ultimately the question of whether a benefit was received will be a factual one for the jury.^[3] The Court also expressly left intact the Second Circuit’s crucial ruling in United States v. Newman^[4] that a remote tippee who receives information second or third hand must know of the personal benefit received by the insider in order to be liable.

Background

The federal courts of appeal for both the Second and Ninth Circuit had issued recent opinions examining Dirks’ “personal benefit” rubric; in granting certiorari in Salman, the Supreme Court said it was addressing “the tension” between those decisions on the personal benefit issue.^[5]

In United States v. Newman, the Second Circuit addressed the Government’s prosecution of two hedge fund managers who allegedly received tips relating to two issuers from individuals who were themselves several steps removed from the original tipper. The tipper associated with one of the issuers, who was in the relevant company’s investor relations department, had provided information about the company’s earnings to a former colleague at an investment firm. In reversing the convictions, the Second Circuit held—in the context of individuals who were professional acquaintances, not close friends—that in order to establish a personal benefit to the tipper, it is necessary that the personal benefit to the tipper is “objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”^[6] The Second Circuit also held that, regardless of the nature of the personal benefit to the tipper, a tippee does not engage in illegal insider trading unless he knows of the personal benefit to the tipper.

The Ninth Circuit held in United States v. Salman^[7] that the fact that the insider and the tippee shared a family relationship was sufficient to prove a personal benefit. The defendant Bassam Salman’s brother-in-law, an investment banker, provided inside information to his brother, who, in turn, shared it with the defendant, who further shared it with his wife’s sister’s husband who traded and shared the resulting profits among the family members involved. Salman was convicted by a jury on four counts of securities fraud and one count of conspiracy to commit securities fraud. The Government argued that one of the required elements of insider trading—that the insider personally benefited from the disclosure of the confidential inside information and that the defendant tippee knew that the insider had personally benefited from the disclosure—was met because, among other things, the insider testified that he gave his brother the information because he loved him and wanted to benefit him, and the Government presented evidence that Salman was aware of the two brothers’ close relationship. The Ninth Circuit distinguished Newman, which was invoked by Salman on appeal, holding that, while pecuniary gain is one species of personal benefit, making a gift of confidential information to a relative is another.

In October 2015, the United States Supreme Court declined to grant certiorari in the Newman case, presumably because the Government did not challenge the Second Circuit’s determination that a tippee must know of the personal benefit to the tipper, which provided an independent ground for reversing the convictions. However, in January 2016, the United States Supreme Court granted certiorari in Salman, which raised the question of what constitutes a sufficient “personal benefit” for insider trading purposes. During oral argument in October 2016, the Justices strongly signaled that they would uphold Salman’s conviction under the “gift” theory given the familial relationship. However, it was less clear how far the Court would decide the scope of such an intangible, non-pecuniary “personal benefit” could extend, particularly when the tipper and tippee were not closely related.

The Supreme Court’s Decision

As expected, in a unanimous opinion, authored by Justice Samuel Alito, the Court held that the jury could infer that the tipper in Salman personally benefited from making a gift of confidential information to a relative who traded on it.

Justice Alito stated that the Court would “adhere to Dirks, which easily resolves the narrow issue presented” by these facts.^[8] In Dirks, the Court held that an insider had to receive a personal benefit in order to be convicted of unlawful insider trading and mere disclosure of confidential information without a personal benefit to the tipper was insufficient. Dirks suggested that a personal benefit could “exist when an insider makes a gift of confidential information to a trading relative or friend,” and “[t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.”^[9] Applying these principles, Justice Alito wrote that it was “obvious” that the insider would have personally benefited had he personally traded on the information and delivered the proceeds from the trades to his brother as a gift.^[10] Justice Alito noted that the insider “effectively achieved the same result by disclosing the information to [his brother], and allowing him to trade on it.”^[11] Adopting the phrasing in the Ninth Circuit’s Salman decision, the Court also noted that, to the extent Newman was inconsistent with Dirks regarding the nature of the personal benefit required for disclosures to relatives, the Supreme Court was adhering to its precedent in Dirks.

The Salman decision is noteworthy for what it did not say. The decision repeatedly emphasized the narrowness of the holding, which was limited to the situation in which information is disclosed among close relatives. Recognizing that there may be other cases in which the analysis of a personal benefit “will not always be easy for courts,” the Court declined to address those situations.^[12] Specifically, the Court stated that “there is no need” to address the scope of the gift theory beyond the gift of confidential information to a trading relative—expressly choosing not to speak to the Government’s argument that the personal benefit test for these types of relationships should be only whether the insider knew that the tippee would trade on the information.^[13] In Newman, for example, the tippee was a former work colleague of the tipper, not a relative or close friend. The Supreme Court did not address or resolve whether the standard for personal benefits articulated by the Second Circuit in Newman will still apply in that context. Finally, as noted, the Supreme Court expressly stated that it was not addressing Newman’s holding that a tippee must know of the personal benefit obtained by the insider.

Implications of the Salman Decision

Based on the Court’s opinion in Salman, following Dirks, it appears settled that when an insider provides a tip to a relative or close friend, a separate pecuniary benefit is not required. This has long been the law and is an entirely unsurprising result, as indicated in the unanimity of the decision. However, the Court’s decision does not address—at all—what constitutes a benefit when the insider and the tippee are not related or close friends, which is the context typically relevant to professional and institutional traders and the area where federal prosecutors have focused particular attention in recent years. While it remains possible that the Supreme Court will address a case more analogous to Newman in the future, Newman for the moment continues to be the applicable law in the Second Circuit in situations involving professional contacts/acquaintances.