Getting By With A Little Help From Friends: United States Supreme Court To Clarify Insider Trading Liability In Tipping Cases

On January 19, 2016, the United States Supreme Court granted certiorari in United States v. Salman, in which the Ninth Circuit Court of Appeals held that the government may prove a "personal benefit" to a tipper of inside information—a necessary element of an insider trading case involving tipping—by showing evidence that an insider made a "gift" of confidential information to a trading relative or friend.1

The Supreme Court's attention to this issue is important because many have questioned the government's ability to aggressively pursue insider trading cases involving tipping since the Second Circuit Court of Appeals December 2014 decision in United States v. Newman.2 Indeed, a review of the Supreme Court's seminal 1983 decision in Dirks v. SEC,3 Newman, and the Ninth Circuit's recent decision in United States v. Salman, respectively, have left unclear the government's burden in insider trading cases involving tipping. Dirks held that a tipper will only be liable for insider trading where he or she provides the information for "personal gain" in violation of his or her fiduciary duty. However, the Court in Dirks did not define fully what constitutes "personal gain." In December 2014, the Second Circuit held in United States v. Newman that to prove such "personal gain," the government must present evidence "of an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature."4 However, in Salman, the Ninth Circuit took a different approach by holding that the government may prove a benefit to the tipper merely by showing evidence that an insider gifted confidential information to a trading friend or relative.5

The Supreme Court's decision in Salman could provide much needed clarity concerning when insider trading liability may exist in tipping cases, especially those involving family and friends.

Dirks v. SEC: The Supreme Court Explains That A Tipper's "Personal Gain" Is Required For Insider Trading Liability

In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court held that "[n]ot only are insiders forbidden by their fiduciary relationship [to the corporation's shareholders] from personally using undisclosed corporate information to their advantage, but they also may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain."6 While Dirks made clear that personal gain was an essential element of proving liability in an insider trading case involving tipping, Dirks and its progeny have left unclear what constitutes sufficient evidence of such gain. The personal gain is clearest when an insider shares material, nonpublic information with an outsider in exchange for a pecuniary benefit. Yet, in other instances, an insider may "gift" such information to a close relative or friend so that individual can trade on the information.7 Specifically, the Court said in Dirks that a personal benefit can be inferred where there are "objective facts and circumstances that often justify such an inference," such as where the "relationship between the insider and the recipient that suggests a quid pro quo from the latter."8 The U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission ("SEC") have argued that even in cases involving "remote tippees," or outsiders who are many steps removed from corporate insiders...