United States: Supreme Court Affirms That Pecuniary Benefit Not Required For Family Member Tips, But Declines To Address What Constitutes A Benefit In Other Contexts

Yesterday, the United States Supreme Court issued a unanimous, but narrow, ruling in Salman v. United States,1 regarding criminal tipper/tippee liability for insider trading, which the Supreme Court had not significantly addressed since its decision in Dirks v. United States in 1983.2 Following Dirks' holding that a tippee cannot be held liable for insider trading unless the tipper receives a "personal benefit," the Supreme Court ruled in Salman that a jury can infer that an insider receives an inherent personal benefit when making a gift of confidential information to a relative who trades on that information. The Court declined to adopt the Government's argument that "a gift of confidential information to anyone, not just a 'trading relative or friend,' is enough" to establish liability, and noted that ultimately the question of whether a benefit was received will be a factual one for the jury.3 The Court also expressly left intact the Second Circuit's crucial ruling in United States v. Newman4 that a remote tippee who receives information second or third hand must know of the personal benefit received by the insider in order to be liable.

Background

The federal courts of appeal for both the Second and Ninth Circuit had issued recent opinions examining Dirks' "personal benefit" rubric; in granting certiorari in Salman, the Supreme Court said it was addressing "the tension" between those decisions on the personal benefit issue.5

In United States v. Newman, the Second Circuit addressed the Government's prosecution of two hedge fund managers who allegedly received tips relating to two issuers from individuals who were themselves several steps removed from the original tipper. The tipper associated with one of the issuers, who was in the relevant company's investor relations department, had provided information about the company's earnings to a former colleague at an investment firm. In reversing the convictions, the Second Circuit held—in the context of individuals who were professional acquaintances, not close friends—that in order to establish a personal benefit to the tipper, it is necessary that the personal benefit to the tipper is "objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature."6 The Second Circuit also held that, regardless of the nature of the personal benefit to the tipper, a tippee does not engage in illegal insider trading unless he knows of the personal benefit to the tipper.

The Ninth Circuit held in United States v. Salman7 that the fact that the insider and the tippee shared a family relationship was sufficient to prove a personal benefit. The defendant Bassam Salman's brother-in-law, an investment banker, provided inside information to his brother, who, in turn, shared it with the defendant, who further shared it with his wife's sister's husband who traded and shared the resulting profits among the family members involved. Salman was convicted by a jury on four counts of securities fraud and one count of conspiracy to commit securities fraud. The Government argued that one of the required elements of insider trading—that the insider personally benefited from the disclosure of the confidential inside information and that the defendant tippee knew that the insider had personally benefited from the disclosure—was met because, among other things, the insider testified that he gave his brother the information because he loved him and wanted to benefit him, and the Government presented evidence that Salman was aware of the two brothers' close relationship. The Ninth Circuit distinguished Newman, which was invoked by Salman on appeal, holding that, while pecuniary gain is one species of personal benefit, making a gift of confidential information to a relative is another.

In October 2015, the United States Supreme Court declined to grant certiorari in the Newman case, presumably because the Government did not challenge the Second Circuit's determination that a tippee must know of the personal benefit to the tipper, which provided an independent ground for reversing the convictions. However, in January 2016, the United States Supreme Court granted certiorari in Salman, which raised the question of what constitutes a sufficient "personal benefit" for insider trading purposes. During oral argument in October 2016, the Justices strongly signaled that they would uphold Salman's conviction under the "gift" theory given the familial relationship. However, it was less clear how far the Court would decide the scope of such an intangible, non-pecuniary "personal benefit" could extend, particularly when the tipper and tippee were not closely related.

The Supreme Court's Decision

As expected, in a unanimous opinion, authored by Justice Samuel Alito, the Court held that the jury could infer that the tipper in Salman personally benefited from making a gift of confidential information to a relative who traded on it.

Justice Alito stated that the Court would "adhere to Dirks, which easily resolves the narrow issue presented" by these facts.8 In Dirks, the Court held that an insider had to receive a personal benefit in order to be convicted of unlawful insider trading and mere disclosure of confidential information without a personal benefit to the tipper was insufficient. Dirks suggested that a personal benefit could "exist when an insider makes a gift of confidential information to a trading relative or friend," and "[t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient."9 Applying these principles, Justice Alito wrote that it was "obvious" that the insider would have personally benefited had he personally traded on the information and delivered the proceeds from the trades to his brother as a gift.10 Justice Alito noted that the insider "effectively achieved the same result by disclosing the information to [his brother], and allowing him to trade on it."11 Adopting the phrasing in the Ninth Circuit's Salman decision, the Court also noted that, to the extent Newman was inconsistent with Dirks regarding the nature of the personal benefit required for disclosures to relatives, the Supreme Court was adhering to its precedent in Dirks.

The Salman decision is noteworthy for what it did not say. The decision repeatedly emphasized the narrowness of the holding, which was limited to the situation in which information is disclosed among close relatives. Recognizing that there may be other cases in which the analysis of a personal benefit "will not always be easy for courts," the Court declined to address those situations.12 Specifically, the Court stated that "there is no need" to address the scope of the gift theory beyond the gift of confidential information to a trading relative—expressly choosing not to speak to the Government's argument that the personal benefit test for these types of relationships should be only whether the insider knew that the tippee would trade on the information.13 In Newman, for example, the tippee was a former work colleague of the tipper, not a relative or close friend. The Supreme Court did not address or resolve whether the standard for personal benefits articulated by the Second Circuit in Newman will still apply in that context. Finally, as noted, the Supreme Court expressly stated that it was not addressing Newman's holding that a tippee must know of the personal benefit obtained by the insider.

Implications of the Salman Decision

Based on the Court's opinion in Salman, following Dirks, it appears settled that when an insider provides a tip to a relative or close friend, a separate pecuniary benefit is not required. This has long been the law and is an entirely unsurprising result, as indicated in the unanimity of the decision. However, the Court's decision does not address—at all—what constitutes a benefit when the insider and the tippee are not related or close friends, which is the context typically relevant to professional and institutional traders and the area where federal prosecutors have focused particular attention in recent years. While it remains possible that the Supreme Court will address a case more analogous to Newman in the future, Newman for the moment continues to be the applicable law in the Second Circuit in situations involving professional contacts/acquaintances.

Footnotes

1 Salman v. United States, Case Number 15-628, 578 U.S. ___ (2016).

Dirks v. S.E.C., 463 U.S. 646 (1983).

Salman, slip op. at 7.

U.S. v. Newman, 773 F.3d 438 (2d. Cir. 2014).

5   Salman, slip op. at 6.

Newman, at 452.

U.S. v. Salman, 792 F.3d 1087 (9th Cir. 2015).

Salman, slip op. at 8.

9   Dirks, at 664.

10  Salman, at 9.

11  Id.

12  Id. at 11 (quoting Dirks at 664).

13   Id. at 11.

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