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April 10, 2017

The Supreme Court Clarifies the Meaning of a Personal Benefit in Insider Trading Cases

In a unanimous decision, the United States Supreme Court recently upheld an insider trading conviction, holding that a jury may infer a personal benefit (for purposes of determining whether one breaches a fiduciary duty and violates Section 10(b) of the Securities and Exchange Act of 1934 (the "Act") and the Securities and Exchange Commission's ("SEC") Rule 10b-5) when an insider discloses confidential information to a trading friend or relative. Salmon v. United States, No. 15-628 (2016).

The Act, as well as SEC Rule 10b(5), prohibits the use of any manipulative or deceptive device in connection with the purchase or sale of securities, including the undisclosed trading on inside information by individuals who are under a corporate duty of trust and confidence not to use such inside information for their personal advantage. Insiders subject to such duties can face both criminal and civil liability for not only trading on inside information, but disclosing such inside information to others for trading purposes. In the latter case, even the recipient of the insider tip (i.e., the tippee or trader) may be liable for insider trading – liability similarly depends on whether the insider (i.e., the tipper) breached his or her duty of trust and confidence.

It has long been held that a breach of an insider's duty occurs when inside information is disclosed for a personal benefit. See Dirks v. SEC, 463 U.S. 646 (1983) (emphasis added). In Dirks, the Court held that a personal benefit can mean both receiving something of value in exchange for the insider tip or making "a gift of confidential information to a trading relative or friend." Dirks, 463 U.S. at 664. In contrast, the Second Circuit in United States v. Newman, 773 F.3d 438, 452 (2d Cir. N.Y. 2014), held that a personal benefit meant more than simply making a gift of confidential information to a trading relative or friend – it meant "proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." The Supreme Court's recent ruling resolves this inconsistency, and adheres to Dirks, confirming that a personal benefit includes the benefit one would obtain from simply making a gift of confidential information to a trading friend or relative. In other words, an insider may be subject to liability without proof that he or she received a financial benefit in exchange for offering inside information.

The Petitioner in Salmon received insider trading tips from an extended family member, who, in turn, received the information from Petitioner's brother-in-law, an investment banker in Citigroup's healthcare investment banking group. The Petitioner's primary argument in challenging his convictions for conspiracy and insider trader was that he cannot be held liable as the tippee because the tipper (his brother-in-law) did not receive a financial benefit in exchange for the tips; and therefore, he did not personally benefit.

However, the Supreme Court held that "when a tipper gives inside information to 'a trading relative or friend,' the jury can infer that the tipper meant to provide the equivalent of a cash gift. 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." In Salmon's case, his brother-in-law breached his duties to Citigroup and its clients when he disclosed confidential information to his brother with the expectation that he would trade on it. It is that duty that Salmon acquired – and subsequently breached – when he traded on the inside information.

The Supreme Court's ruling is important because it preserves its 1983 decision in Dirks, confirming that giving gifts of insider trading information to friends and relatives violates the law. It also suggests that traders who are a step removed from the insider may still be subject to liability in the case of a friend or relative.


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