Shearman & Sterling LLP | Government Regulatory Enforcement Blog | Opening Supreme Court Brief in Salman Highlights the Debate Over the Personal Benefit Standard for Insider Trading <br >  
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  • Opening Supreme Court Brief in Salman Highlights the Debate Over the Personal Benefit Standard for Insider Trading 
    On May 6, 2016, Appellant Bassam Salman filed his opening brief with the Supreme Court in Salman v. United States, a closely-watched appeal of an insider trading conviction that has the potential to resolve ongoing ambiguity in insider trading law, especially prevalent since the Second Circuit’s December 2014 decision in United States v. Newman, 773 F.3d 438, over when a remote tippee can be convicted of insider trading.

    Under Supreme Court precedent established in Dirks v. SEC, insider trading actions—because they are rooted in fraud statutes—must be predicated on an insider acting for “personal benefit” or some other misappropriation of confidential, inside information.  In general, courts have held that this can be established by an insider who trades for profit, an individual who misappropriates confidential information and trades for profit, or an insider or misappropriator who “tips” information to a third party in exchange for something of value or makes a gift of that information when the “relationship between the insider and the recipient . . . suggests a quid pro quo from the latter, or an intention to benefit the particular recipient.” 463 U.S. 646, 662-64 (1983).  Following the Second Circuit’s decision in Newman, however, there has been some debate as to whether the Court was correct in holding that a personal benefit to the insider, or quid pro quo, cannot be inferred from the mere transfer of information in the “absence of proof of a meaningfully close personal relationship” between the tipper and tippee. 773 F.3d at 452.

    Salman appeals from a Ninth Circuit decision holding that he could be held criminally liable for trading on information that Salman learned from his friend, Michael Kara, who in turn was tipped off by his brother, Maher Kara, a former investment banker who is also Salman’s brother-in-law. 792 F.3d 1087 (2015).  The Ninth Circuit held that the evidence was sufficient for a jury to conclude that Maher Kara had made a gift of confidential information to his brother, which was enough to both show a personal benefit under Dirks and uphold Salman’s insider trading conviction.

    In his brief to the Supreme Court, Salman asserts that the Ninth Circuit decision should be overturned because (1) his conviction does not comport with Dirks, (2) liability for insider trading should not extend to remote tippees who are one or more steps removed from the tipper, and, most provocatively, (3) the inference of a personal benefit to a tipper cannot be based on a personal relationship between the tipper and tippee alone.  Salman argues that allowing prosecutors to obtain insider trading convictions on the basis of a personal relationship alone reduces the “personal benefit” requirement of insider trading law to “a meaningless peppercorn.”

    While it seems unlikely that the Supreme Court would hold that a personal relationship—if  sufficiently close—cannot alone give rise to the necessary “personal benefit” for insider trading liability under Dirks, Salman’s appeal affords the Supreme Court an important opportunity to clarify what prosecutors must prove to establish criminal liability for insider trading.  Especially since the Second Circuit’s landmark decision in United States v. Newman, which held that it was impermissible to infer the presence of a benefit from the “mere fact of a friendship, particularly of a casual or social nature” unless there was 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,” whether a defendant can be liable for insider trading where the tipper makes a “gift” of the trading proceeds is a murky issue.  Newman, 773 F.3d at 659-62.

    Underscoring the current murkiness over applicable standards, on Monday the SEC filed a brief in the District Court of Massachusetts that argued that because Newman was not a First Circuit case it need not be followed. SEC v. Spivak, et al., No. 1:15-cv-13704 (D. Mass.).  Indeed, the SEC argued that “pursuant to Dirks, First Circuit precedent, and even under the Newman decisions itself, tippee liability may be based upon a tipper’s breach of a duty of trust and confidence caused by making an improper gift of confidential information to a trading relative or friend, and certainly to a lover.” 

    Regardless of what the Supreme Court ultimately holds in Salman, consideration of the issue could provide valuable clarity.