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WHITE-COLLAR CRIME

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EXPERT ANALYSIS

VOLUME 31, ISSUE 2 /NOVEMBER 2016

Supreme Court Revisits Insider Tradings

Personal Benefit Requirement
By Jason de Bretteville, Esq., and Kenneth Hsu, Esq.
Stradling Yocca Carlson & Rauth

On Oct. 5, the U.S. Supreme Court heard the much-anticipated oral arguments in
Salman v. United States, No. 15-628, its first insider trading case in nearly two decades. Calls from
defendant Bassam Salmans counsel to limit this crime to its core did not find a friendly audience.
And it appears that a majority of the court may be comfortable with reaffirming or at most, slightly
clarifying the standards for imposing liability that existed before the 2nd U.S. Circuit Court of
Appeals landmark decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014).
Before Newman, it was well-established law that trading on inside tips was illegal only if the tipper
received a personal benefit in exchange for material inside information. Newman, however, appeared
to raise the burden for satisfying this standard by requiring evidence of a benefit that is objective,
consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.
In Salman, however, Justice Stephen Breyer was openly skeptical not only of the strict standard
advocated by Salmans counsel but also of the 2nd Circuits view in Newman. Several other justices
appeared to share that skepticism, at least in part.

THE PERSONAL BENEFIT REQUIREMENT

At the heart of Salman is the issue of whether a defendant may be liable for insider trading even
when the tipper did not receive any pecuniary or similarly concrete benefit.
The debate in Salman originates with the Supreme Courts seminal 1983 opinion in Dirks v. Securities
and Exchange Commission, 463 U.S. 646, which made trading on inside tips illegal only if the tipper
received a personal benefit in exchange for material inside information.
In Dirks, the court gave several examples of circumstances that would support the imposition of
liability under this standard, including when an insider makes a gift of confidential information to
a trading relative or friend.
Based on this language, the personal benefit requirement has been interpreted by courts and
regulators alike as setting a very low threshold one capable of being satisfied by mere evidence of
a meaningfully close personal relationship between the tipper and the tippee.
As a result, the relevance of this requirement was often limited to cases involving remote tippees
who, because of the fact that they were third-hand or fourth-hand recipients of the tip, had little or
no knowledge of the relationship between the tipper and the initial recipient.
This changed after Newman, which both affirmed the need to prove that tippees had knowledge of
the personal benefit received by the tipper and required, for the first time, that the personal benefit
be of a pecuniary or similarly valuable nature.
The Supreme Court refused to hear the governments appeal, and numerous prior convictions and
existing indictments were called into question.

WESTLAW JOURNAL WHITE-COLLAR CRIME

Shortly thereafter, in Salman, 792 F.3d 1087 (9th Cir. 2015), the 9th U.S. Circuit Court of Appeals
spawned more confusion and debate when it held that a familial connection or friendship,
perhaps even of a casual or social nature, could be enough to satisfy the Dirks personal benefit
test.
Many commentators found it difficult to reconcile the 9th Circuits ruling in Salman with Newmans
discussion of pecuniary benefits.

ARGUMENT BEFORE THE SUPREME COURT

At the heart of Salman is the

issue of whether a defendant
may be liable for insider
trading even when the tipper
did not receive any pecuniary
or similarly concrete benefit.

Several commentators anticipated that the Supreme Court would use Salman as an opportunity to
revamp insider trading law and possibly abandon the personal benefit requirement altogether
in favor of a more objective standard that is closely tethered to the anti-fraud prohibitions of
Section 10(b) of the Securities Exchange Act of 1934.
On Oct. 5, however, several justices appeared reluctant to break from the courts decades-old
precedent or otherwise reconceptualize Dirks.
Justices Elena Kagan and Sonia Sotomayor, in particular, appeared to be skeptical of Salmans
arguments in favor of severely limiting liability for insider trading. The justices characterized
those arguments as requests to ignore some extremely specific language in Dirks describing
evidence of a gift as sufficient to establish liability.
In response, Salman argued that the discussion of gifts in Dirks was mere dicta and that the
holding requires evidence of personal gain an argument that only Justice Anthony Kennedy
appeared to accept.
The government, in turn, argued for the broadest possible construction of Dirks one that would
criminalize even an anonymous gift to a complete stranger. Specifically, under questioning from
Chief Justice John Roberts, the government argued that any gift that is not for a corporate
purpose is by definition made for personal benefit.
This argument met with substantial resistance from several justices. For example, pointing to
language from Dirks describing gifts to a trading relative or friend, Justice Breyer stated, That
doesnt sound as if the writer of those words had in mind any person in the world.
The government, however, was undeterred, and it insisted that proof of a lack of corporate
purpose and knowledge of the tippees intent to trade alone, without any evidence of a specific
personal benefit, should be sufficient to establish criminal liability.
Predicting outcomes based on comments and questions from Supreme Court justices is a
perilous exercise. Nonetheless, the oral arguments in Salman suggest that the court may be not
be ready or willing to provide the kind of fundamental reform hoped for by those on both sides
of the debate, and that a modest reformation of the standard in Dirks is all that can be expected.

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2 | NOVEMBER 2016 VOLUME 31 ISSUE 2

n

Jason de Bretteville (L) is a shareholder and chair of the white collar, enforcement defense
and investigations practice of Stradling Yocca Carlson & Rauth in Newport Beach, California.
Kenneth Hsu (R) is an associate in the firms business litigation and securities litigation practices.

2016 Thomson Reuters