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Gift Giving and Insider Trading: The Supreme Court Rules in Government’s Favor in Significant Insider Trading Case

December 07, 2016

By The Investigations and White Collar Defense & The Securities Litigation Practice Groups

In recent years, courts have struggled with—and come to varying conclusions concerning—a fundamental issue regarding insider trading: what constitutes a “personal benefit” that if received by an insider or tipper can lead to liability? On December 6, 2016, in a highly anticipated decision, the Supreme Court issued a unanimous opinion in Salman v. United States upholding defendant Bassam Salman’s conviction for insider trading. The Court held that prosecutors could establish tipper liability, even if a tipper received no pecuniary benefit, where the tipper provided only a gift of material, nonpublic information to a trading relative or friend. In such circumstances, a gift would be sufficient to demonstrate that the insider received a “personal benefit” in breach of the insider’s fiduciary duty.

In so ruling, the Supreme Court rejected the more restrictive view articulated in United States v. Newman, which had required prosecutors to prove that an insider, who “gifted” information to a trading relative or friend, also received “a pecuniary or similar benefit” in exchange for the tip. The Salman decision reaffirms the standard that existed prior to Newman, which the Court set decades ago in Dirks v. SEC.

The Supreme Court’s reasoning in Salman relied heavily on the language and standard established in Dirks, starting with the premise that, for a tippee to be liable for insider trading, the tipper must have breached a fiduciary duty. For the purposes of insider trading, however, a breach of fiduciary duty by an insider who discloses material, non-public information occurs only when the insider personally benefits from the disclosure. The Court emphasized that a tipper’s disclosure of inside information without a personal benefit is “not enough” to prove insider trading. Although some “objective” facts may demonstrate that the insider received a personal benefit (i.e., the receipt of pecuniary gain or a reputational benefit that will translate into future earnings), the Salman Court made clear that a gift of confidential information from an insider to a trading relative or friend can also satisfy the “personal benefit” requirement, because the tip and subsequent trade is the equivalent of an insider who trades on the information and then gives the proceeds to the relative or friend. Thus, according to the Court, “the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”

The Salman decision rejected Newman to the extent Newman required the government to prove that an insider who provided information to a trading relative or friend must also have received something of a “pecuniary or similarly valuable nature.”

However, the facts of Salman and Newman were very different—Salman involved the sharing of information between family members and close friends while Newman involved tippees who were four or five steps removed from the original tippers. Left unanswered by the Salman decision is the type of personal benefit the government must show in Newman-like cases where the tippees are not “trading relatives or friends” of the tipper.


   Salman v. United States, 580 U.S. __ (2016), 2016 WL 7078448 (Dec. 6, 2016).

   773 F.3d 438 (2nd Cir. 2014), cert. denied, 136 S. Ct. 242 (2015).

 463 U.S. 646, 103 S. Ct. 3255, 77 L. Ed. 2d 911 (1983).

  Salman, 2016 WL 7078448, at *8.

   Id.

Contributors

Image: Mark D Pollack
Mark D Pollack
Partner, Litigation Department and General Counsel

Image: Kenneth M Breen
Kenneth M Breen
Partner, Litigation Department

Image: Nathaniel B Edmonds
Nathaniel B Edmonds
Partner, Litigation Department

Image: Kevin P Broughel
Kevin P Broughel
Partner, Litigation Department

Image: S. Joy Dowdle
S. Joy Dowdle
Partner, Litigation Department

Image: Jay Darden
Jay Darden
Partner, Litigation Department

Image: Barry G Sher
Barry G Sher
Partner, Litigation Department

Image: Timothy L Dickinson
Timothy L Dickinson
Senior Counsel, Litigation Department

Image: Corinne A Lammers
Corinne A Lammers
Partner, Litigation Department

Image: William F Sullivan
William F Sullivan
Senior Counsel, Litigation Department

Image: Gary F. Giampetruzzi
Gary F. Giampetruzzi
Partner, Litigation Department

Image: Kevin C Logue
Kevin C Logue
Partner, Litigation Department

Image: Michael L Spafford
Michael L Spafford
Partner, Litigation Department

Image: Thomas A. Zaccaro
Thomas A. Zaccaro
Partner, Litigation Department

Image: Christopher H McGrath
Christopher H McGrath
Partner, Litigation Department

Image: Kwame J Manley
Kwame J Manley
Partner, Litigation Department

Image: Tara K Giunta
Tara K Giunta
Partner, Litigation Department

Image: Daniel Prince
Daniel Prince
Partner, Litigation Department

Image: Robert D Luskin
Robert D Luskin
Partner, Litigation Department

Image: Edward Han
Edward Han
Partner, Litigation Department

Image: Peter M Stone
Peter M Stone
Partner, Litigation Department

Image: Samuel W Cooper
Samuel W Cooper
Partner, Litigation Department

Image: Nick Morgan
Nick Morgan
Partner, Litigation Department

Image: Morgan J Miller
Morgan J Miller
Partner, Litigation Department

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John P Nowak
Partner, Litigation Department

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For More Information

Image: Mark D Pollack
Mark D Pollack
Partner, Litigation Department and General Counsel
Image: Kenneth M Breen
Kenneth M Breen
Partner, Litigation Department
Image: Nathaniel B Edmonds
Nathaniel B Edmonds
Partner, Litigation Department
Image: Kevin P Broughel
Kevin P Broughel
Partner, Litigation Department
Image: S. Joy Dowdle
S. Joy Dowdle
Partner, Litigation Department
Image: Jay Darden
Jay Darden
Partner, Litigation Department
Image: Barry G Sher
Barry G Sher
Partner, Litigation Department
Image: Timothy L Dickinson
Timothy L Dickinson
Senior Counsel, Litigation Department
Image: Corinne A Lammers
Corinne A Lammers
Partner, Litigation Department
Image: William F Sullivan
William F Sullivan
Senior Counsel, Litigation Department
Image: Gary F. Giampetruzzi
Gary F. Giampetruzzi
Partner, Litigation Department
Image: Kevin C Logue
Kevin C Logue
Partner, Litigation Department
Image: Michael L Spafford
Michael L Spafford
Partner, Litigation Department
Image: Thomas A. Zaccaro
Thomas A. Zaccaro
Partner, Litigation Department
Image: Christopher H McGrath
Christopher H McGrath
Partner, Litigation Department
Image: Kwame J Manley
Kwame J Manley
Partner, Litigation Department
Image: Tara K Giunta
Tara K Giunta
Partner, Litigation Department
Image: Daniel Prince
Daniel Prince
Partner, Litigation Department
Image: Robert D Luskin
Robert D Luskin
Partner, Litigation Department
Image: Edward Han
Edward Han
Partner, Litigation Department
Image: Peter M Stone
Peter M Stone
Partner, Litigation Department
Image: Samuel W Cooper
Samuel W Cooper
Partner, Litigation Department
Image: Nick Morgan
Nick Morgan
Partner, Litigation Department
Image: Morgan J Miller
Morgan J Miller
Partner, Litigation Department
Image: John P Nowak
John P Nowak
Partner, Litigation Department