Pomerantz LLP

SCOTUS Hears Oral Argument On Standards For Insider Trading

Attorney: Leigh Handleman Smollar
Pomerantz Monitor November/December 2016

We previously reported to you about the controversial decision by the Ninth Circuit, U.S. v. Salman, decided July 6, 2015, upholding an insider trading conviction. 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 he “could readily have inferred [his brother-in-law’s] intent to benefit [his brother].” 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.”

The Salman decision was a departure from the holding in a 2014 Second Circuit Newman decision, which overturned the insider trading convictions of hedge fund managers, who received information down the line. The Newman decision interpreted the standard for “personal benefit” more strictly, finding that prosecutors must show that the tipper received a “tangible” benefit. The split amongst the circuits allowed the Ninth Circuit Salman decision to appeal to the Supreme Court of the United States. On October 5, 2016, SCOTUS heard oral argument on the issue of what constitutes “personal benefit” for purposes of insider trading. This is the first insider trading case to come before SCOTUS in 20 years. Specifically, SCOTUS considered whether insider trading includes tips on material, nonpublic information passed between relatives and friends, without any financial benefit to the tipper.

Prosecutors argued that a tipper who simply provides a “gift,” e.g., the tip, to family and friends, constitutes a benefit for purposes of insider trading. Opposing counsel argued that the benefit should be something that can be monetized. SCOTUS questioned both sides of the argument. While skeptical about giving prosecutors broad authority to determine whether the tip was a gift, SCOTUS seemed more skeptical in allowing insider trading only when the tipper gains a monetary benefit. Justice Anthony Kennedy said “you certainly benefit from giving to your family. . . It enables you and, in a sense it – it helps you financially because you make them more secure.” Justice Breyer stated, “to help a close family member is like helping yourself.” Justices Breyer and Kagan seemed to suggest that the defendants’ position would require SCOTUS to change the statute that has been used to prosecute insider trading for decades. The Justices seemed reluctant to do so, given the fact that such a holding would conflict with the SCOTUS 1983 decision in Dirks v. SEC, which held that insider trading violates the federal securities laws if an insider makes a gift of nonpublic information to a trading relative or friend.

The tougher question is whether the government’s position would apply to an unrelated friend, such as when a tipper tips nonpublic information to an acquaintance. The Justices seem to be struggling with where to draw the line. Justice Kagan seemed to suggest that they don’t need to draw the line on this more esoteric situation.

A ruling by the court should clarify what prosecutors must prove to secure insider trading convictions based on tipping, and how far the Justices draw the line.