In United States v. Salman, the Ninth Circuit recently held that a remote tippee could be liable for insider trading in the absence of any “personal benefit” to the insider/tipper where the insider had a close personal relationship with the tippee. This opinion is significant in that it appears at first glance to conflict with the Second Circuit’s decision last year in United States v. Newman, in which the court overturned the conviction of two remote tippees on the grounds that the government failed to establish first, that the insider who disclosed confidential information in that case did so in exchange for a personal benefit, and second, that the remote tippees were aware that the information had come from insiders. In Newman, the Second Circuit overturned a jury’s conviction of two portfolio managers for insider trading. There, the insiders were personal friends of the original tippees, but did not otherwise receive any personal benefit in exchange for disclosing confidential information. The government argued that under Dirks v. SEC it needed to establish only that the tippees “traded on material, nonpublic information they knew insiders had disclosed in breach of a duty of confidentiality” in order for liability to be found. The Second Circuit rejected this position and held that the government was required to establish that the insider disclosed confidential information in exchange for a personal benefit, and that the remote tippees were aware of this fact. In so holding, the court reasoned that the government’s approach would “revive the absolute bar on tippee trading that the Supreme Court explicitly rejected in Dirks.”
The Second Circuit further held that Dirks “does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.” Otherwise, practically any relationship could qualify as a “benefit.” Rather, the Second Circuit found that “[t]o the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and the tippee . . . we hold that 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” (emphasis added).
In Salman, the Ninth Circuit was faced with precisely the type of “meaningfully close personal relationship” that was lacking in Newman. There, the defendant’s brother-in-law, Maher Kara, was the insider who disclosed confidential information to his brother, Michael Kara. The remote tippee defendant was aware that Maher Kara disclosed confidential information to his brother and that the brothers shared a close relationship.
Bassam Salman, the defendant in the case, argued that the Ninth Circuit should follow Newman, which Salman argued required the government to establish that an insider disclosed confidential information in exchange for a known, tangible personal benefit to the tipper. Salman argued that under Newman, “evidence of a friendship or familial relationship between the tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit.”
The Ninth Circuit rejected the defendant’s reading of Newman. The court cited the Supreme Court’s opinion in Dirks, which expressly held that “[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.” The court then looked to Newman, where the Second Circuit similarly found that a “meaningfully close personal relationship” could serve as the basis for liability in the absence of a tangible personal benefit. In Newman, the court found that no such meaningfully close personal relationship existed and there was no evidence that the remote tippee defendants were even aware that the information in question had come from insiders. In contrast, the insider in Salman disclosed confidential information to his brother, with whom he had a close relationship, and the remote tippee was aware of the close relationship. The Ninth Circuit therefore reasoned that its decision in Salman was entirely consistent with the Second Circuit’s opinion in Newman. The Ninth Circuit further stated, however, that to the extent Newman stood for the proposition that a meaningfully close relationship, standing alone, was insufficient to create insider trading liability, the court declined to follow Newman.
Thus, while the Salman opinion may appear at first glance to conflict with Newman, that conflict arises from the factual differences in the two cases—specifically the difference between the insider’s relationship with the tippee to whom confidential information was initially disclosed. Salman, therefore, can be viewed as an extension of and consistent with Newman.