Last year, we speculated about the likelihood that the Supreme Court would accept a significant insider trading case at the urging of the Justice Department. Although the Supreme Court denied cert in United States v. Newman from the Second Circuit, the subject of the DOJ request a few months ago, it will now review an insider trading conviction from the Ninth Circuit: United States v. Salman.
In Salman, a day trader was convicted of making $1.7 million based on tips from his brother-in-law in investment banking. The Ninth Circuit, in an opinion written by Senior District Judge Jed Rakoff sitting by designation from the Southern District of New York, rejected the Second Circuit test set forth in Newman which essentially required a meaningful close personal relationship that generates an exchange of potential pecuniary gain.
The Supreme Court heard its last insider trading case in 1983, when the Supreme Court established the conditions for a tippee to be liable for insider trading. Dirks held in part that insider trading requires the insider to personally benefit from the disclosure.
The Second Circuit in Newman held that a friendship between the tipper and tippee was insufficient proof of a personal benefit. In Salman, the Ninth Circuit declined to apply the test to the case because of the clear precedent in Dirks that there could be a personal benefit to passing inside information to a relative or friend.
The issue squarely before the Supreme Court now is how much evidence is needed to prove a benefit based on a family relationship or friendship, when there is not a tangible, monetary gain for the tipper.
It should make for an interesting oral argument. We will keep watch out for the Supreme Court opinion due to the potential impact on potential SEC whistleblower claims for reporting insider trading.