Pomerantz LLP

Ninth Circuit Refuses to Follow Second Circuit's Insider Trading Decision

Attorney: Leigh Handelman Smollar
Pomerantz Monitor July/August 2015

In a controversial decision written by Manhattan U.S. District Judge Rakoff, sitting by designation, the 9th Circuit recently upheld an insider trading conviction and, in the process, refused to follow the standard established by the Second Circuit in its Newman opinion decided in 2014. That case made it more difficult to convict recipients of inside information (“tippees”) by requiring the govern-ment to show that the tippee was not only aware that the information came from a corporate insider, but also that he or she knew that the insider (the “tipper”) had received a tangible benefit in exchange for leaking the information, a benefit that was “objective, consequential and rep-resents at least a potential gain of a pecuniary or similarly valuable nature.” Newman rejects the theory that leaking to enhance a personal, family or business relationship satisfies the personal benefit requirement. Several guilty pleas obtained from tippees were overturned based on the decision.

The Newman case involved tippees who were several layers removed from the tipper’s original disclosure of inside information. When inside information is passed around an investment firm, for example, it may be difficult to prove that someone way down the information food chain was aware of the original source of the leak and that the tipper had received a personal benefit.

In U.S. v. Salman, decided July 6, 2015, the 9th Circuit has refused to follow Newman. In that case Salman’s brother- in-law leaked inside information to his own brother, who in turn, shared that information with Salman. The evidence at trial showed that Salman knew that his brother-in-law was the original source of the inside information.

But the evidence also showed that Salman did not know about any tangible economic benefit received by his brother-in-law in exchange for leaking the information.

But the 9th Circuit disagreed with the Second Circuit in Newman and affirmed the conviction anyway. The court held that the “personal benefit” requirement did not require that the tipper receive a financial quid pro quo. Instead, it held that it was enough that Salman “could readily have inferred [his brother-in-law’s] intent to benefit [his brother].” In declining to follow Newman, the court noted that if the standard required that the tipper received something more than the chance to benefit a close family member, a tipper could provide material non- public information to family members to trade on as long as the tipper “asked for no tangible compensation in return.”