Source: https://www.ropesgray.com/en/newsroom/alerts/2016/December/Supreme-Court-Confirms-Broad-Reach-of-Insider-Trading-Liability
Timestamp: 2019-04-24 05:56:44+00:00

Document:
Today, the Supreme Court issued its decision in Salman v. United States, clarifying the personal benefit standard of insider trading under the federal securities laws. In resolving what it called a “narrow” issue, the Court reaffirmed the long-standing “guiding principle” of Dirks v. SEC that disclosing nonpublic material information to a “trading relative or friend,” even without any showing of pecuniary or tangible gain to the tipper, can give rise to criminal insider trading liability.1 In such situations, the Court concluded, giving is as good as receiving, “the commonsense point . . . made in Dirks.”2 That is, the “tip and trade resemble trading by the insider followed by a gift of the profits to the recipient.”3 Salman thus underscores that market participants should continue to exercise vigilance when disseminating or receiving any material nonpublic information.
The Court’s decision today resolves a brewing dispute among the lower courts concerning the scope of tipper-tippee liability in insider trading cases. In particular, the Supreme Court took up Salman to decide whether a tipper had received a personal benefit for purposes of insider trading liability when he or she makes a gift of material nonpublic information to a relative who thereafter trades on that information. The Supreme Court answered in the affirmative, overturning some lower courts, including the Second Circuit, which had previously held that a tipper must also receive something of a “pecuniary or similarly valuable nature” in exchange for the tip.
In 2014, the Second Circuit in United States v. Newman held that a corporate insider who made a gift of confidential information could not be held criminally liable unless the insider also received a personal benefit that “represent[ed] at least a potential gain of a pecuniary or similarly valuable nature.”5 In the 2015 United States v. Salman decision, however, the Ninth Circuit rejected the Second Circuit’s limited reading of Dirks and affirmed an insider trading conviction on the basis of an insider who had simply “ma[de] a gift of confidential information to a trading relative or friend.”6 Today, the Supreme Court affirmed the Ninth Circuit’s decision and thereby overruled the Second Circuit’s more limited reading of insider trading liability.
Notably, however, the Court’s Salman narrow ruling is limited to tips made to friends and family. It leaves open the possibility that tips made to acquaintances may be subject to a different standard and may, for example, still require the exchange of something “pecuniary or similarly valuable” to result in insider trading liability. And it leaves undisturbed the requirement that the government show that a trading defendant knew that a corporate insider received a personal benefit in exchange for the tip.
Salman makes clear that the Court’s decades-old Dirks decision set forth the correct standard for the definition of personal benefit. Under the right circumstances, as exemplified by Salman, the government may prosecute tippers and tippees where the insider conferred gifts or profits to a relative or friend. Thus, in Salman’s wake, government regulators will likely pursue insider trading cases with increased vigor. Absent a need to show that a corporate tipper disclosed confidential information for a tangible benefit or pecuniary gain, the government will likely launch more investigations and litigate more cases involving exchanges with only social or reputational benefits to the tipper. In particular, arrangements in Salman’s mold, where a corporate insider disseminates confidential information to a family member in order to obtain private advantage, may attract increased scrutiny from the government. All told, Salman may make it easier for the government to go after downstream tippees, including those who are multiple levels removed from the corporate insider, as long as they possess knowledge of the initial exchange that was made for direct or indirect personal benefit.
After Salman, corporate professionals are advised to trade with at least the same diligence and care as they have always undertaken. Legal and compliance departments are encouraged to continue monitoring trading activity and encouraging an open dialogue with employees regarding the dissemination and receipt of material nonpublic information. That said, the personal benefit test is a legal issue that need not influence trading decisions. Regulators will likely assess whether there was a personal benefit only after the government has issued a subpoena or otherwise initiated an investigation. But in the meantime, government enforcement activities carry the risk of reputational harm to the business, distraction from core business concerns, and added legal fees and expenses.
If you have any questions, or would like to discuss the above or any related matter, please contact the Ropes & Gray attorney with whom you regularly work.
1 Salman v. United States, 580 U.S. __, Op. at 8 (2016).
3 Id. at 10 (quoting Dirks v. SEC, 463 U.S. 646, 663 (1983)).
4 463 U.S. 646, 663-64 (1983).
5 773 F.3d 438, 451- 452 (2d Cir. 2014).
6 792 F.3d 1087, 1092 (9th Cir. 2015).
16 Op. at 10 (2016).

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