Supreme Court Poised to Revisit Scope of Insider Trading Liability
It has been more than three decades since the Supreme Court last weighed in on insider trading liability in Dirks v. SEC, 463 U.S. 646 (1983). Meanwhile, the high profile trials of Martha Stewart, Jeff Skilling, Raj Rajaratnam, to name a few, have kept insider trading in the spotlight. On Oct. 5, 2016, the Supreme Court heard oral argument in Salmon v. U.S., an insider trading case that stands to make waves in the trading community and courtrooms across the country.
In Salmon, an investment banker shared material non-public information with his brother, who in turn shared that information with his future brother-in-law. The future brother-in-law was convicted for making a series of profitable trades based on that non-public information. The 9th Circuit affirmed. In his briefing to the Supreme Court, the defendant argued that the government should have had to prove the investment banker – the original source of the tip – personally benefited from the tip to his brother. The defendant based his argument on a recent 2nd Circuit decision that held a personal benefit sufficient to trigger insider trading liability must be “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (U.S. Oct. 5, 2015).
The government advocates that a tip to a relative or friend is itself a personal benefit to the tipper. The government’s position is rooted in the language of Dirks: “The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.” 463 U.S. at 664.
At oral argument, the justices were hostile to a narrow or concrete interpretation of what constitutes a “personal benefit.” For instance, Justice Kagan stated to the defendant’s counsel “[y]ou’re asking us to cut back significantly from something that we said several decades ago, something that Congress has shown no indication that it’s unhappy with, and in a context in which, I mean, obviously the integrity of the markets are a very important thing for this country.” Justice Kennedy echoed this loyalty to Dirks: “Dirks says there's a benefit in making a gift… [Y]ou certainly benefit from giving to your family.”
The Justices’ questioning at oral argument suggests that the defendant’s conviction is likely to be affirmed. However, the government made a fairly significant concession, stating that the Supreme Court “doesn’t have to reconceptualize Dirks…. If the Court feels more comfortable given the facts of this case of reaffirming Dirks and saying that was the law in 1983, it remains the law today, that is completely fine with the government.” That position walks back the more government’s more aggressive stance in briefing, which sought to expand liability by treating a tip to an acquaintance as a personal benefit.