All eyes were on the U.S. Supreme Court yesterday as it heard
arguments in Salman v. United States (No.
15-628) concerning the "personal benefit" required to
establish a claim for insider trading. After an hour punctuated by
the Justices' constant questioning of attorneys for both the
defendant and the government, it appears unlikely that the Supreme
Court will radically depart from its 1983 decision
in Dirks v. SEC, which held that insider trading
violates the federal securities laws if an insider makes a gift of
nonpublic information to a trading relative or friend.
According to a transcript of yesterday's hearing, Bassam
Salman's attorney argued that Salman should not be held
criminally liable for insider trading because the original tipper
– Salman's future brother-in-law, who had worked for an
investment bank – had tipped confidential information to his
brother without receiving any financial benefit. Salman's
attorney maintained that, unless and until Congress enacts a
definition of insider trading, the crime of insider trading should
be limited to cases where the insider tipper receives a financial
However, some of the Justices seemed worried that adopting
Salman's argument would conflict with the Supreme Court's
decision in Dirks. "You're asking us to cut
back significantly from something that we said several decades ago,
something that Congress has shown no indication that it's
unhappy with," said Justice Elena Kagan. "[O]bviously the
integrity of the markets are a very important thing for this
country. And you're asking us essentially to change the rules
in a way that threatens that integrity."
A number of the Justices appeared to concur that gifting
nonpublic information to a family member benefits the tipper.
Justice Anthony Kennedy said "you certainly benefit from
giving to your family. . . It ennobles you and, in a
sense it – it helps you financially because you make them
Whether that rationale should apply to an unrelated friend,
however, is less clear. The Justices grappled with the question of
whether criminal liability arises in more attenuated relationships
not involving family members or even close friends, such as when a
tipper tips nonpublic information to his barber or to a
down-on-his-luck stranger on the street.
Whether the Supreme Court ultimately draws such a line remains
to be seen. Justice Stephen Breyer said "I am worried about
line drawing," and Justice Kagan asked "why not separate
out that strange, unusual, hardly-ever-prosecuted situation and say
we're not dealing with that here? We have nothing to say about
As we have previously written here, the Supreme Court's
decision could resolve a possible split between the Ninth Circuit
and the Second Circuit on the type of "personal benefit"
that constitutes a violation of the federal securities laws. In
particular, in the 2014 decision in United States v.
Newman, the Second Circuit held that, to the extent that
"a personal benefit may be inferred from a personal
relationship between the tipper and
tippee, . . . 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." The Supreme Court
previously denied certiorari in Newman, but, during
yesterday's hearing, at least one Justice might have questioned
the Newman decision. Justice Breyer commented
that to adopt the Second Circuit's "minority"
approach "is really more likely to change the law that people
have come to rely upon than it is to keep to it."
Both Wall Street and prosecutors nationwide await the Supreme
Court's decision with anticipation, hoping that it will provide
clarity on criminal liability for insider trading based on tipping
– especially in situations not involving family members.
The Corporate Council of the Corporation Law Section of the Delaware State Bar Association released groundbreaking draft legislation proposing to amend several sections of the Delaware General Corporation Law (DGCL).
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