The U.S. Supreme Court has agreed to hear the challenge to the Ninth Circuit Court of Appeal's decision in United States v. Salman, a case that hinges on the interpretation of the "personal benefit" component of insider trading offences. Due to the apparent inconsistent approach between Salman and the Second Circuit's decision in United States v. Newman and Chiasson, there has been a divergence over the proper scope of liability for downstream tippees. While the U.S. Supreme Court refused to hear the federal government's challenge to Newman last year, its decision to grant the writ for certiorari in Salman presents an opportunity to clarify and provide greater certainty to American securities law and insider trading cases in the future.
In Salman, an insider working in a major financial institution's healthcare banking group testified that he provided material non-public information about pending deals to his brother. The brother then passed on the information to Salman, who then traded on that information despite being "well aware" that the insider was the source of that information.
Salman urged the court follow the standard under Newman, which requires that prosecutors in insider trading cases demonstrate that insiders/tippers receive a "personal benefit" that "is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature". Additionally, Newman requires that prosecutors must prove tippees knew that the insiders provided the information in exchange for a personal benefit. Salman argued that since the insider gained "nothing" that was "objective, consequential, and represent[ing] at least a potential gain of a pecuniary or similarly valuable nature", that there could be no liability for a downstream tippee.
The Ninth Circuit did not follow the Second Circuit's interpretation in Newman of "personal benefit" and found that the relationship between the insider and his brother was sufficient for finding a "gift of confidential information to a trading relative or friend", affirming Salman's conviction. The decision in Salman thus created a split between the circuits over the correct scope of downstream tippee liability in insider trading cases. Interestingly, both Salman and Newman are rooted in, but draw differing conclusions from, the Supreme Court's seminal decision in Dirks v SEC.
In their writ of certiorari to the U.S. Supreme Court, the petitioners in Salman argued that the inconsistent approach taken in that case and Newman creates "uneven enforcement" of insider trading offences and urged the court to restore order to American securities law. Further, the petitioners argued that the court's decision in Newman was grounded in both a finding that there was no personal benefit to the insider and a finding that the defendant lacked knowledge of any personal benefit to the insider. However, since Salman met the knowledge component of the offence – he knew both that the insider was the source of the information and that he had an extremely close relationship to his brother that was of mutual benefit – the court's interpretation of "personal benefit" was determinative of the case's outcome.
The U.S. Supreme Court's answer to the challenge to Salman could have a profound impact on the boundaries of insider trading liability, providing an opportunity to resolve the apparent circuit split. As we have discussed in earlier blog posts, the decision in Newman has frustrated prosecutors' efforts to secure convictions in insider trading and tipping cases by increasing the evidentiary burdens on the government, leading to some prosecutors dropping securities enforcement cases in response. However, the different factual circumstances underlying each of these cases, and in fact underlying all insider trading and tipping cases, may permit the Court to reaffirm the importance of context to the resolution of these types of cases.
The Canadian experience has also produced mixed interpretations of the evidentiary burden for insider trading and tipping offences. The OSC's 2015 decisions in Finkelstein and Ageuci (both decisions are under appeal) found that circumstantial evidence was sufficient proof to establish a violation of securities law (without regard to evidence of knowledge of benefit to the alleged tipper). By contrast, the Alberta Court of Appeal's 2014 decision in Walton v Alberta (Securities Commission), from which the Supreme Court of Canada refused to grant leave to appeal, suggests that something more than mere circumstantial evidence is necessary to meet the evidentiary burden needed for a finding of a breach. Canadian regulators and market observers will no doubt be paying close attention to how the U.S. Supreme Court addresses the Salman case and to the judicial attitude and approach to insider trading offences.
We will continue to monitor and write about the developing saga of U.S. and Canadian securities law as additional judicial guidance unfolds.
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