The Future of Insider Trading: Salman

The future path of insider trading may well be determined by the case which will be argued before the Supreme Court today, Wednesday, October 5, 2016. The case is U.S. v. Salman, No. 15-628, a tipping case from the Ninth Circuit centered on two brothers and their brother-in-law. In many ways the case traces its roots not just to the Ninth Circuit’s decision in this case (here) but also to that of the Second Circuit’s in U.S. v. Newman, 771 F. 3d 646 (2nd Cir. 2014) (here), and ultimately to the High Court’s ruling in Dirks v. SEC, 463 U.S. 646 (1983).

Petitioner Salman and Respondent both claim to faithfully apply the teachings of Dirks. (Petitioner’s opening brief is discussed here and the reply here; Respondent’s Opposition, here). Interestingly, neither party claims to follow or rely on Newman which initially sought to draw a line in the sand as to third and fourth tier tippees in criminal cases using Dirks just as the Supreme Court did decades ago between the lawful and unlawful disclosure of inside information.

Despite their claims to hew close to Dirks, the parties have taken very different approaches. Petitioner has limited the Dirks personal benefit test to one that is pecuniary in nature. That applies even to a gift. The key to this point of view is the statement in Dirks that the trading by the tippee resembles that of the insider. If the insider trades, he or she seeks trading profits. If the recipient of the gift trades he or she seeks trading profits. If the tipping insider must benefit in the same fashion from a gift of inside information to another, then the personal benefit must be pecuniary reasons Petitioner.

Petitioner backstops this argument with the fundamental concept that there are no common law crimes. Citing the Court’s jurisprudence on implied causes of action under Section 10(b), which call for restraint when interpreting the court made damage remedy, and the underlying constitutional principles of decisions such as McNally v. U.S., 483 U.S. 350 (1987), which declined to write elements for a vague honest services criminal statute, Petitioner contends that any broader definition of insider trading is for Congress, not the courts.

Petitioner’s reading of Dirks is narrow. The test would potentially permit insiders to furnish inside information to virtually anyone as long as there is no quid pro quo in the form of money or perhaps something readily convertible to money.

In contrast, the Government’s position is broad to the point of being virtually open-ended. It is built in steps, first broadening the fundamental idea from the classic theory of insider trading that inside information can only be used for a corporate purpose to the inverse – communication of the information where there is a lack of corporate purpose are not permitted. The Government then shifts to the notion that any transmission of inside information to an outsider for trading – not a corporate purpose — is banned by Dirks. Viewed in this framework the concept of a gift is not limited to relatives and close friends as stated in Dirks, since those are only examples in the Government’s view. Rather, it applies to anyone. The Dirks bright line test which delimited the instances when there is illegal tipping transforms under this approach to any instance when an insider transmits inside information to an outsider for trading. It is difficult to reconcile this approach with the foundation of Dirks — parity of information is not required by the insider trading laws.

In essence the parties in Salman appear to have etched the outrebounds of insider trading for the High Court. The Court, however, seems unlikely to adopt either approach. While Petitioner’s theory is extremely limited, the Government’s approach to insider trading would eliminate the bright line of Dirks. Since the Court has demonstrated a repeated adherence to its precedents absent a compelling reason to rewrite them – and none is apparent here – it seems likely that the basic approach of Dirks will be affirmed. Its framework of drawing a bright line, requiring a personal benefit to the insider and the demand for objective evidence will likely remain. Consistent with the foundation on which Dirks was built, it is likely that benefit will have to be real and substantial but not necessarily cash.

Finally, it seems probable that the Court to retain the well established notion of a gift in connection with the personal benefit test. But not in the broad open, ended formulation suggested by the Government. Rather, in a formulation that is consistent with the requirement that there be objective evidence of a real personal benefit to the insider from making the gift and a family or close relationship. This formulation of the overall test may result in a determination that looks more like Newman than Salman. How this formulation will apply to Petitioner is likely to be resolved on remand by the lower courts.

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