On December 6, 2016, the U.S. Supreme Court issued one of its most significant rulings on insider trading in recent years. In its ruling in Salman v. United States,1the Supreme Court unanimously upheld Bassam Yacoub Salman’s insider trading conviction, stating that federal insider trading statutes prohibit corporate insiders from making gifts of confidential information to family or friends, regardless of any tangible personal or financial benefit the corporate insider received in exchange.
The Court relied on its prior ruling in Dirks v. SEC,2reiterating that, “a jury can infer a personal benefit—and thus a breach of the tipper’s duty—where the tipper receives something of value in exchange for the tip or ‘makes a gift of confidential information to a trading relative or friend.’”3The Court rejected Salman’s argument that he could not be held liable because the tipper, his brother in law, received no tangible benefit from the exchange. Instead, the Court ruled that in insider trading cases involving a friend or relative, “when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”4
Partial Overturn of U.S. v. Newman
This decision represents a significant victory for prosecutors, as well as a partial reversal of the recent Second Circuit decision in United States v. Newman.5In that case, the Second Circuit held, in part, that even where a friendship or familial relationship exists, prosecutors must still offer proof of “at least a potential gain of a pecuniary or similarly valuable nature.”6In Salman, the Supreme Court specifically overturned Newman to the extent that the Second Circuit required proof of additional gain to the tipper in cases involving the provision of confidential information to family and friends. The Supreme Court declined to reach the other significant holding from Newman, specifically that the government must prove the defendant knew the insider received a personal benefit in exchange for the information.
Swift Reactions
The U.S. Attorney for the Southern District of New York, who was dealt an unfavorable decision in the Newman case, responded quickly to news of the Supreme Court's decision in Salman, saying that “the Court stood up for common sense and affirmed what we have been arguing from the outset – that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public. Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”7
While the Supreme Court’s latest ruling in Salman is significant, it is still limited to insider trading cases involving close friends or family. The Supreme Court did not reach other areas of insider trading law that are still relatively in flux—such as the benefit required in cases that do not involve friends and family or the question of what downstream tippees must know about the benefit to the insider. The true impact of the decision is still developing, but it is clear that Salman will only strengthen the government’s ability and interest in prosecuting insider trading cases. Companies should continue to vigilantly monitor developments and train employees on the contours of their responsibilities towards confidential information and the heavy consequences of trading on such information.
For more information on the Supreme Court’s ruling, please contact any member of the securities litigation practice at Wilson Sonsini.
