Salman v. U.S.: Supreme Court Resolves Insider Trading Split

On December 6, 2016, the United States Supreme Court affirmed an insider trading conviction in a case where the “insider” obtained no direct pecuniary benefit from the disclosure.  Justice Samuel Alito, writing for a unanimous court, held that a recipient of insider information may still be criminally liable where the insider initially gave the information to a trading relative or friend and thereby received a “personal benefit.”  The court heard oral arguments in October.

Salman v. United States concerned the prosecution of Bassam Salman, a recipient of insider tips from Michael Kara, his brother in law, who in turn received insider information from his brother, Maher Kara.  Salman knew that Michael, who also traded on the information, was getting tips from Maher, a Citigroup banker working on various health care deals.  Maher, the “tipper,” never received any financial or other concrete benefit in the exchange, but testified that he suspected Michael was trading on the information he provided and there was evidence the brothers had a close relationship.

Salman was convicted and his conviction was upheld by the Ninth Circuit, which, in so holding, declined to adopt the Second Circuit’s 2014 decision in US v. Newman, which held that insider trading requires 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.” The Ninth Circuit instead found that the Supreme Court’s 1983 holding in Dirks v. SEC provided sufficient guidance and that Dirks expressly held that insider trading can result in liability where “an insider makes a gift of confidential information to a trading relative or friend.”  In affirming Salman’s conviction, the Ninth Circuit addressed the tension with Second Circuit, stating that to the extent Newman stood for the proposition that a meaningfully close relationship, standing alone, was insufficient to create insider trading liability, the Ninth Circuit declined to follow its reasoning.

The Supreme Court noted the potential conflict between the Second and Ninth Circuits, but, rather than directly overruling Newman, the Court noted that “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”

The Supreme Court also acknowledged that courts will now have to confront closer questions about “whether an insider personally benefits from a particular disclosure.” The Court declined to address those questions explicitly, instead confining its holding only to circumstances that include a direct “gift of confidential information to a trading relative that Dirks envisioned.”

Despite these open issues about what kind of “personal benefit” might be sufficient to trigger liability, the apparent repudiation of the Second Circuit’s holding in Newman may result in an increase in tippee/tipper enforcement in the Second Circuit.  In an interview in January 2016, the “Sheriff of Wall Street,” US Attorney Preet Bharara noted that Newman would make it “very, very hard if not impossible to bring a certain kind of insider trading case.”  While Bharara and his team scored their first post-Newman insider trading conviction of Sean Stewart in August, analysts noted that Newman had appeared to chill prosecution in the Southern District, and the holding certainly appeared to affect the prosecution’s approach to the Stewart case.  The Supreme Court’s decision in Salman may now reopen the door to prosecution of difficult “tippee liability” cases that Bharara viewed as having been foreclosed by Newman.