Supreme Court Reviews Insider Trading

by Bryan Cave
Contact

On Wednesday, October 5, 2016, the U.S. Supreme Court heard oral argument in the highly anticipated insider trading case, Salman v. U.S., in which it is anticipated the Court will address conflicting decisions of the Second and Ninth Circuits regarding the requirements for establishing insider trading by a remote “tippee.” Specifically, the Court is expected to rule on what benefit a “tipper” must receive and to what extent the “tippee” must have knowledge of that benefit.

Salman seeks to have his conviction for insider trading overturned. The Supreme Court case, however, focuses not on Salman’s conduct, but on the motive and benefit obtained by his tipper, Maher Kara. Kara was an investment banker at CitiGroup, Inc. who provided insider information to his brother. The brother then passed this information along to Salman.

The Supreme Court articulated the general principles of tipper and tippee liability long ago in Dirks v. SEC: “Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain.” The Dirks Court found that the test for determining whether the corporate insider had breached his fiduciary duty “is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty . . . [a]nd absent a breach by the insider, there is no derivative breach.”

The Second Circuit relied on this language in U.S. v. Newman. The Second Circuit ruled that to impose tippee liability, the government must establish that the tippee knew of the personal benefit received by the insider in disclosing insider information to prove that the tippee knew or should have known of the breach. In effect, Newman requires that the government must show that the insider received a concrete benefit from disclosing the information.

Salman seeks to extend the Newman standard to all insider trading cases, requiring evidence that the tipper received a tangible benefit in exchange for the inside information. The Ninth Circuit denied Salman’s argument that the Second Circuit’s Newman decision should be followed, holding “[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.’”

In briefing and at oral argument, Salman again argued that a concrete benefit received by the tipper should be required. Salman argued that the crime of insider trading should be limited “to its core,” which is the insider’s abuse of undisclosed, inside information for his own personal benefit. Salman argued that Mr. Kara only provided the inside information because he was being “pestered” by his brother. During argument, Justice Ginsburg noted that Mr. Kara benefited from disclosing the inside information because he was no longer being pestered. Justine Kennedy indicated that he read the ruling of Dirks as allowing prosecution when the insider gave the information without expecting compensation: “Dirks says there is a benefit in making a gift.”

The government seeks to vastly broaden the theory of tippee liability set forth in Dirks by arguing that the personal-benefit standard in Dirks is satisfied where an insider discloses “corporate information without a corporate purpose.” Justice Alito commented that the government’s interpretation of Dirks is as inconsistent as Salman’s interpretation.

Hard questioning of Salman’s position during oral argument from many of the Justices suggests that the Court’s decision is likely to substantially impact, and perhaps do away with, the standard set by the Second Circuit in Newman.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bryan Cave | Attorney Advertising

Written by:

Bryan Cave
Contact
more
less

Bryan Cave on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.