Attorney: Omar Jafri
Pomerantz Monitor September/October 2016
The Supreme Court has agreed to hear a case next term involving the standards for insider trading convictions. At issue is whether the government must prove that a corporate insider (the tipper) received a personal benefit of a “pecuniary or similarly valuable nature” in exchange for disclosing confidential information to a remote tippee. In the case in which certification was granted, U.S. v. Salman, the Ninth Circuit held that the “personal benefit” requirement was satisfied when the tipper, Maher Kara, a former investment banker at Citigroup, leaked confidential information about mergers and acquisitions in the healthcare industry to his older brother, Michael, who, in turn, passed it on to Maher’s brother-in-law, Salman.
Maher and Michael pled guilty and cooperated with the government during Salman’s trial. Maher testified that he willingly disclosed confidential information to “benefit” Michael and “fulfill whatever needs he had.” Michael testified that he told Salman that Maher was the source of the information, and that Salman agreed to “protect” Maher from exposure. The Ninth Circuit concluded that, in light of the parties’ close-knit relationships, Salman must have known that Maher intended to benefit his elder brother when he leaked the confidential information. Based on these facts, the Ninth Circuit upheld Salman’s conviction on the ground that Maher gave “a gift of confidential information to a trading relative or friend,” and there was sufficient evidence to conclude that Salman knew that Maher personally benefited from the disclosure.
In affirming Salman’s conviction, the Ninth Circuit relied on Dirks v. SEC, where the Supreme Court held that an insider trading conviction requires that the tipper must receive a personal benefit in exchange for leaking confidential information to a tippee. In Dirks, the Supreme Court defined a personal benefit to the tipper as a “pecuniary gain,” “a reputational benefit” or “a gift of confidential information to a trading relative or friend.”
In concluding that Salman’s conduct constituted “a gift of confidential information to a trading relative or friend,” the Ninth Circuit rejected Salman’s request to adopt the Second Circuit’s novel and restrictive approach towards insider trading cases. In U.S. v. Newman, the Second Circuit held two years ago that a close personal or familial relationship between the tipper and the tippee, without more, is not sufficient to show that the tipper obtained a personal benefit unless the government proves that the tipper received “ . . . at least a potential gain of a pecuniary or similarly valuable nature.” In October 2015, the Supreme Court denied the government’s request to review the Second Circuit’s decision in Newman.
In our view, the Second Circuit’s approach contradicts the Supreme Court’s holding in Dirks that a “gift of confidential information to a trading relative or friend” constitutes a personal benefit. The legal and ordinary definitions of the term “gift” do not contemplate an exchange, consideration or any kind of “pecuniary” or “similarly valuable” benefit in return. For over thirty years, convictions based on insider trading have been sustained even if the tipper did not receive a tangible benefit in exchange for breaches of fiduciary duties and the consequential disclosure of material, nonpublic information. Until Newman was decided in 2014, every Circuit held that the law does not require a tipper to obtain a pecuniary benefit, and every Circuit to rule on the issue since Newman has held the same. While the Second Circuit paid lip service to Dirks’ holding by acknowledging that its prior precedent broadly defined a personal benefit to include a “gift of confidential information,” the new rule it crafted in Newman has upended well-settled law and wreaked havoc on the justice system. Several high-profile convictions and guilty pleas entered in courts in the Second Circuit have been set aside based on Newman.
To the extent that the three-judge panel in Newman chose to adopt a more restrictive approach to provide clarity and certainty in the law, the effort seems to have failed. In a recent trial in New York City, a former investment banker was convicted of insider trading based on leaking confidential information about healthcare mergers to his father. The government argued that the defendant obtained a pecuniary benefit because his father paid certain expenses in connection with the defendant’s wedding. Defendant, however, claimed that the wedding expense payments were not a “pecuniary benefit” but were, instead, a “gift.” Friends and relatives give gifts to each other all the time. Drawing such distinctions brings us right back into a gray area subject to endless uncertainty.
In urging the Supreme Court to adopt the Second Circuit’s standard and limit convictions to instances where an insider obtains a “potential gain of a pecuniary or similarly valuable nature,” Salman argues that the Ninth Circuit’s approach raises separation-of-powers and Due Process concerns, and delegates to prosecutors the power to legislate by defining, on an ad hoc basis, the kinds of personal benefits that can make the difference between guilt and innocence. Over the last decade, the Supreme Court, including Justices on both sides of the ideological divide, has been increasingly receptive to these types of arguments when high-profile white collar criminal defendants or powerful politicians accused of corruption are involved. For example, two months ago, the Supreme Court overturned the conviction of Virginia’s ex-governor, in part, because it held that ingratiation and access in exchange for lavish gifts and money does not constitute corruption. That decision was unanimous. Whether it will influence the Court’s decision in Salman remains to be seen.