On December 6, 2016, the U.S. Supreme Court issued its opinion in Salman v. United States, upholding the Ninth Circuit Court of Appeals’ affirmation of the conviction of Bassam Salman for insider trading.
In its 1983 ruling in Dirks v. SEC, the Supreme Court held that (1) a person who trades on insider information received in a tip hinges on whether the tipper’s disclosure breaches a fiduciary duty of the tipper, which occurs when the tipper discloses the information for a personal benefit; and (2) a personal benefit may be inferred 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.
The Second Circuit Court of Appeals (which includes New York) decided in 2014 that the mere fact of a tip from an insider to a friend or relative does not automatically meet the “personal benefit” test, unless there is “proof of a meaningfully close personal relationship” between tipper and tippee “that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”
In Salman, the Ninth Circuit Court of Appeals declined to follow the Second Circuit and held that simply because the case involved “a gift of confidential information to a trading relative,” the “personal benefit” test was met and no further proof of gain to the tipper was needed.
To resolve the split between circuits, the Supreme Court held that the Ninth Circuit properly applied Dirks to affirm Salman’s conviction. The Supreme Court said to the extent the Second Circuit had held that the tipper must receive something of a pecuniary or similarly valuable nature in exchange for a gift to a trading relative, that rule was inconsistent with Dirks.
The ruling was an important victory for government prosecutors. Based on the 2014 Newman ruling, prosecutors in New York had dropped a number of insider trading charges due to the additional proof of financial benefit required.
For more information, please contact your Michael Best attorney.