United States: Supreme Court Reaffirms Personal-Benefit Requirement For Insider Trading

The Supreme Court confirmed today that the "personal benefit" required to establish a claim for insider trading can consist of making a gift of material, nonpublic information to a family member or friend and that an exchange of "something of a pecuniary or similarly valuable nature" is not required. The decision in Salman v. United States (No. 15-628) reaffirms the Court's 1983 ruling in Dirks v. SEC and appears to undercut the Second Circuit's 2014 decision in United States v. Newman, which had sought to tighten the nature of the personal-benefit requirement.

The Court's ruling does not break new ground on insider trading and leaves the law as it had been before the Second Circuit's Newman decision generated a round of questions about what constitutes a legally cognizable "personal benefit." But the decision is also significant because the Court reaffirmed the personal-benefit requirement and expressly declined to decide whether that requirement applies not only in "classical" cases of insider trading, but also in "misappropriation" cases.

Factual Background

The Salman case arose from an alleged insider-trading scheme involving members of an extended family. The tipper, who worked for an investment bank, allegedly had provided confidential information to his brother about the bank's clients, knowing that the brother would trade on the information. The brother then tipped Salman, whose sister had become engaged to and later married the tipper. The brother eventually pled guilty to insider trading and testified for the Government against Salman.

The evidence at trial showed that the tipper and his brother had enjoyed "a close and mutually beneficial relationship." The tipper testified that he "'love[d] [his] brother very much' and that he gave [him] the inside information in order to 'benefit him' and to 'fulfill[] whatever needs he had.'" The evidence also showed that Salman had been aware of the brothers' "close fraternal relationship." The jury convicted Salman, and the Ninth Circuit affirmed the conviction.

Ninth Circuit's Decision

The Ninth Circuit based its ruling on the Dirks decision, which had established the framework for tippee liability. Dirks held that tippee liability depends on tipper liability – and that a tipper breaches a fiduciary duty by disclosing confidential information only if he or she benefited directly or indirectly from the disclosure. The Supreme Court defined the "personal benefit" that constitutes the insider's breach of duty as including "a pecuniary gain or a reputational benefit that will translate into future earnings." The Court added: "[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend."

Applying Dirks, the Ninth Circuit held that the tipper's "disclosure of confidential information to [his brother], knowing that [the brother] intended to trade on it, was precisely the 'gift of confidential information to a trading relative' that Dirks envisioned." The court also found sufficient evidence that Salman – the indirect tippee – had known the initial source of the tip and that the jury "could readily have inferred [the tipper's] intent to benefit [his tippee-brother]."

Salman contended on appeal that the Second Circuit's Newman decision required a more rigorous interpretation of Dirks's personal-benefit requirement and that something more than a mere family relationship was needed to establish a breach of duty. Newman had 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 Ninth Circuit rejected Salman's contention that the direct tippee's familial relationship with his tipper-brother was insufficient to demonstrate that the tipper had received a benefit without "at least a potential gain of a pecuniary or similarly valuable nature." Instead, the Ninth Circuit concluded that, "[t]o the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an 'insider makes a gift of confidential information to a trading relative or friend.'" The court therefore held that "[p]roof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading."

Salman sought and obtained review from the Supreme Court as to the question: "Does the personal benefit to the insider that is necessary to establish insider trading under Dirks . . . require proof of 'an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,' as the Second Circuit held in [Newman], . . . or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?"

Supreme Court's Decision

The Supreme Court unanimously affirmed the Ninth Circuit and held that Dirks "easily resolves the narrow issue presented here."

The Court reiterated the rule that "a tippee is exposed to liability for trading on inside information only if the tippee participates in a breach of the tipper's fiduciary duty." The examination of tippee liability thus must start with the tipper. "Whether the tipper breached [his or her] duty depends in large part on the purpose of the disclosure to the tippee." The test for tipper liability under Dirks is "whether the [tipper] personally will benefit, directly or indirectly, from his disclosure." The Court thus confirmed that "the disclosure of confidential information without personal benefit is not enough."

As to the nature of the requisite personal benefit, the Court reemphasized Dirks's holding that "a tipper breaches a fiduciary duty by making a gift of confidential information to 'a trading relative,' and that rule is sufficient to resolve the case at hand." "[W]hen 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."

The Court rejected Salman's reliance on Newman and ruled 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."

Salman's Implications

The Salman decision is short, unanimous, and tied to existing precedent. The decision therefore does not alter insider-trading law, although it might put to rest at least some of the rumblings that Newman had raised. But the Court's ruling is also significant for what it did not do.

First, the Court did not retreat from the personal-benefit requirement. The Government had urged the Court to adopt a broad distinction between disclosure for corporate purposes and disclosure for noncorporate purposes – and to hold that any disclosure for a noncorporate purpose satisfies Dirks. But the Court did not rule so broadly. A personal benefit is still required. Nor did the Court jettison the personal-benefit requirement and adopt a broad parity-of-information principle, which would have prohibited trading on material, nonpublic information without further analysis of breaches of duty or personal benefits.

Second, the Court assumed without deciding that the personal-benefit requirement applies in all insider-trading cases, whether brought under the "classical" theory (which involves a breach of duty to the issuer and its shareholders) or under the "misappropriation" theory (which involves a breach of duty to the source of the information). The parties in Salman did not dispute that the personal-benefit analysis applied under both theories, so the Court "proceed[ed] on the assumption that it does." The potential distinction between the two theories has been an issue since the Newman decision, with the Government arguing that Newman was a classical-theory case and that its stringent personal-benefit requirement does not apply to misappropriation-theory cases. That argument apparently remains alive at the Supreme Court level, although lower courts do not appear to have accepted it.

Third, subsequent cases might explore whether the Supreme Court meant to draw any distinctions between tips to family members and tips to friends. On the one hand, the Court held that Dirks's holding that "a tipper breaches a fiduciary duty by making a gift of confidential information to 'a trading relative' . . . [was] sufficient to resolve the case at hand" (emphasis added). On the other hand, the Court observed that, "[t]o the extent the Second Circuit held [in Newman] 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" (emphasis added). Future defendants might argue that Salman is only about "trading relatives," not mere "friends," and that a more rigorous construction of the personal-benefit requirement is still appropriate for friends, even if not for relatives. The Government will likely respond that Dirks addressed both "trading relative[s] or friend[s]" and that the Supreme Court reaffirmed Dirks.

Fourth, the Salman decision did not involve another critical element of tippee liability: whether the tippee knew or should have known that the tipper had received a legally cognizable personal benefit (whatever that benefit might be). Even if no distinction between family and friends exists for purposes of the personal-benefit requirement, the difference could matter in connection with the tippee's knowledge of the benefit. An argument or inference that a remote tippee knew or consciously avoided knowing of the tipper's benefit might be more tenable where the direct tippee was related to the tipper than where the direct tippee was merely a friend of the tipper.

We will continue to watch how Salman plays out in future cases.

Supreme Court Reaffirms Personal-Benefit Requirement For Insider Trading

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions