By Justin Saif
In a unanimous decision, the U.S. Supreme Court has taken a strong stance in favor of protecting investors and the integrity of public markets against insider trading. In its decision, authored by Justice Samuel Alito, the Supreme Court upheld a criminal conviction for trading on confidential inside information received second-hand from a relative of the tipper.
In this case, Salman v. United States, the defendant's brother-in-law worked for Citigroup as an investment banker and had a fiduciary duty not to disclose certain confidential information about the bank's clients. The Citigroup banker gave confidential client information to his brother with the expectation that his brother would trade on it, and his brother passed it along to the defendant, Salman, who made over $1.5 million trading on the information.
Salman claimed that the required personal benefit to the banker was absent because neither he nor the banker's brother gave the banker money for the tip. The Court found that "[t]he jury could infer that the tipper here personally benefited from making a gift of confidential information to a trading relative. In such situations, 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 thus reaffirms the Supreme Court's 1983 decision in Dirks v. SEC, in which the Court established the personal benefit standard.
During oral argument in October, Justice Elena Kagan, in a statement to counsel for the defendant, presented the Supreme Court's concern that changing the rules governing insider trading by loosening the personal benefit standard would have a negative impact on market integrity: "Obviously the integrity of the markets is a very important thing for this country. And you're asking us essentially to change the rules in a way that threatens that integrity."
The Supreme Court's ruling strikes down a key portion of the Second Circuit's 2014 decision in United States v. Newman, which required that the tipper in an insider trading case receive something "of a pecuniary or similarly valuable nature." However, the Supreme Court's opinion leaves a lot unknown about how this new insider-trading formulation will work in practice. For example, the facts in Salman did not require the Supreme Court to consider whether the trader must know that the confidential information came from an insider who received a personal benefit, another aspect of the Second Circuit's ruling in Newman. Additionally, the limitation of the Salman decision to gifts of inside information made to relatives or friends may require prosecutors to grapple with the nature of the relationship between the tipper and the tippee, as the decision leaves open whether a gift of insider information to someone who does not qualify as a relative or friend could establish criminal liability for insider trading.
Preet Bharara, U.S. Attorney for the Southern District of New York, praised the decision in a reported statement: "The [C]ourt stood up for common sense and affirmed what we have been arguing from the outset—that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public. Today's decision is a victory for fair markets and those who believe that the system should not be rigged."
Bharara's office has aggressively prosecuted insider trading, and commentators viewed the Second Circuit's Newman decision as a major setback to Bharara's ability to continue to bring criminal prosecutions for insider trading. Bharara and his office will now have the opportunity to bring future prosecutions based on the Supreme Court's decision—something he will no doubt do given his recent meeting with President-elect Trump, after which Bharara announced that he had "agreed to stay on" in his role as U.S. Attorney.