Supreme Court Clarifies “Personal Benefit”: Requirement for Insider Trading Liability

The Supreme Court issued a unanimous ruling today in which it clarified a key element which the government must prove to establish a charge of insider trading. The Court held that the “personal benefit,” which a tipper must receive from the tippee in order to establish liability, may be in the form of a gift to a trading relative or friend.

The case, U.S. v. Salman[1], involved the transfer of confidential information from one brother (the tipper) to another brother (the tippee) which was then passed on to a third person, the defendant Salman, who traded on the information. The tipper-brother did not receive anything of pecuniary value from his tippee-brother; rather, the tipper testified that he tipped the information to his brother because he loved his brother and wanted to “benefit him” and “fulfill [] whatever need he had.” The Supreme Court held that, due to the close personal relationship between the tipper and the tippee, the desire of the tipper to make a gift to the tippee was a sufficient “benefit,” and it was not necessary for the benefit to have some pecuniary value to the tipper. Relying on an earlier Supreme Court decision, Dirks v. SEC[2], the Court ruled today that “when an insider makes a gift of confidential information to a trading relative or friend . . . [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.” The Court further held that, in such situations, it is not necessary for the government to show that the tipper received something of a “pecuniary or similarly valuable nature.”

While the ruling in Salman eases somewhat the government’s burden of proving insider trading cases, there are still some significant hurdles which the government must overcome in such cases. Apart from showing that the tipper received a benefit or intended to make a gift, the government also must prove that the tippee who traded on the inside information knew or had reason to know that the tipper received the benefit or intended to make a gift, and that the disclosure was made in breach of a duty. Those elements were not in dispute in Salman because the person who actually traded (i.e., the tippee of the tippee-brother) was fully aware of the relationship between the two brothers. Also, the Supreme Court itself recognized in its decision that “in some factual circumstances assessing liability for gift-giving will be difficult.” Indeed, a significant open question, in light of this decision, is: when does the relationship between the tipper and tippee rise to the level of a “friendship,” which would render the tip a “gift” and thereby satisfy the “personal benefit” requirement?

The Salman decision does not, therefore, remove the significant obstacles which the government faces when bringing cases against tippees who are far removed from the source of the original tip. But for the original tippers – and for tippees who are close to the source of the tip -- the government’s burden was made somewhat easier as a result of today’s decision.

[1] No. 15-628, slip op. (S. Ct., December 6, 2016).

[2] 463 U.S. 646 (1983).

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12.07.2016  |  PUBLICATION: BulletPoint  |  TOPICS: Investment Management, Securities

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