Recent Developments in Insider Trading Law. For the last 30 years, the seminal insider trading case discussing tipper/tippee liability has been the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983). In Dirks, the Supreme Court found that for insider trading liability to attach there must be a breach of a fiduciary duty by an insider who received a personal benefit in exchange for disclosure of material, nonpublic information. Put another way, “absent some personal gain, there has been no breach of duty” and thus no tipper liability. Additionally, tippee liability—liability of the individual who traded on the insider’s information—is derivative of tipper liability, so absent a tipper’s breach, which necessarily includes a personal benefit, there can be no liability. Tippee liability also requires that he or she has knowledge of the tipper’s breach.
The personal benefit requirement of insider trading law has been the subject of recent court opinions and commentary, particularly with respect to whether mere friendship, without any financial incentive or gain, suffices for insider trading liability. In United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Second Circuit answered a qualified “no” to that question. That is, in Newman, the court found that inferring personal benefit from a relationship between the tipper and tippee requires “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 court further found that inferring a personal benefit requires evidence of “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].” Id. at 452.
Any clarity on the personal benefit requirement from Newman was short-lived, as reflected in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015) a case that has added yet another chapter to the uncertainty surrounding insider trading law. The case involved trading by Michael Kara on insider information obtained by his brother, Maher Kara, a former Citigroup healthcare investment banker. Michael Kara, in turn, provided the information to Bassam Yacoub Salman, whose sister had become engaged to Maher Kara. Salman, with another brother-in-law’s assistance, ultimately traded on the inside information. In 2011, in connection with this alleged familial insider trading scheme, Salman was indicted for conspiracy and securities fraud. A jury later found him guilty on all five counts. Salman appealed his conviction, but did not raise Newman because the Second Circuit had not yet issued its opinion. Following Newman, Salman moved for leave to challenge his conviction based on Newman, and the Ninth Circuit accepted this additional ground for appeal, finding that the government was not prejudiced by Salman’s eleventh hour reliance on Newman, as both parties had fully briefed and argued the issues raised by Newman.
On appeal, Salman claimed that his conviction could not stand in light of Newman because the government had failed to prove that Maher Kara had disclosed confidential information for a tangible benefit or that Salman knew of any such benefit. The Ninth Circuit rejected Salman’s position and affirmed his insider trading conviction. Sitting by designation and writing the Ninth Circuit’s Salman opinion was United States Senior Judge for the Southern District of New York, Jed S. Rakoff. Ironically, Judge Rakoff’s opinion first recognized that Newman, a Second Circuit opinion, is not binding on the Ninth Circuit. Nevertheless, Judge Rakoff—who is exceedingly familiar with Second Circuit insider trading law (see, e.g., SEC v. Payton, No. 14 Civ. 4644, 2015 U.S. Dist. LEXIS 44732 (S.D.N.Y. Apr. 6, 2015), United States v. Gupta, No. 11 Cr. 907 (JSR), 2015 U.S. Dist. LEXIS 86635 (S.D.N.Y. July 2, 2015))—noted that the Ninth Circuit “would not lightly ignore [Newman], the most recent ruling of our sister circuit in an area of law that it has frequently encountered.” Salman, 792 F.3d at 1092.
Recognizing Newman’s relevance, however, did not mean extending it to the circumstances in Salman, which Judge Rakoff refused to do, finding that “[t]o the extent Newman can be read to go so far [as Mr. Salman had suggested], we decline to follow it. Doing so would require us to depart from the clear holding of Dirks [v. SEC, 463 U.S. 646 (1983) Id. at 1093.],” the seminal Supreme Court insider trading case. Judge Rakoff recognized that “[o]f particular importance” to the Salman case was the Supreme Court’s finding in Dirks that “[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information as to a trading relative or friend.” Id. Judge Rakoff further noted that “Newman itself recognized that ‘personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, …the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.’” Id. at *6 (quoting Newman).
At its core, the Ninth Circuit seemed reluctant to extend Newman: “[i]f Salman’s theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.” Id at 1094.
The Salman opinion, and its arguable inconsistency with Newman, also could be viewed as reinforcing Judge Rakoff’s previously-stated belief that congressional action to define the outlines of insider trading liability is necessary. Indeed, the absence of statutes specifically proscribing insider trading has been a focus of Judge Rakoff, who has noted in prior opinions “if insider trading is to be properly deterred, it must be adequately defined” and … “[t]he appropriate body to do so, one would think, is Congress.” Payton, 2015 U.S. Dist. LEXIS 44732, at *1. It will be interesting to follow in the coming sessions whether Congress accepts Judge Rakoff’s call to action and seeks to clarify the murky waters of insider trading law through statute. It also will be interesting to see if the Supreme Court accepts the government’s petition for review of the Newman case, which it filed on July 30, 2015, particularly given the daylight between Salman and Newman, as well as the host of recent and to come insider trading cases.