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EXPERT ANALYSIS

VOLUME 32, ISSUE 13 / DECEMBER 27, 2016

In Wake of Salman, Friendship is Key Question


For Insider Trading Liability
By Jason de Bretteville, Esq., and Kenneth Hsu, Esq.
Stradling Yocca Carlson & Rauth

What is a friendship? This is the question the U.S. Supreme Court prompted in its Dec. 6 opinion
Salman v. United States, 137 S. Ct. 420 (2016), in which it reaffirmed a long-standing rule that gifts of
inside information to trading relatives and friends trigger criminal insider trading liability. Despite
calls to reform insider trading laws, the court chose to do little more than modestly restate the
holding in its 1983 opinion in Dirks v. Securities and Exchange Commission, 463 U.S. 646.
In Dirks the court made trading on inside tips illegal if the tipper received a personal benefit in
exchange for material insider information. Under Dirks and now under Salman, a jury can find such
personal benefit when an insider makes a gift of confidential information to a trading relative or
friend.
Salman thus confirmed that prosecutors can, at least in theory, sustain a conviction base on little
more than evidence of a non-anonymous gift of information.

THE PERSONAL BENEFIT REQUIREMENT


In Salman, for the first time since Dirks, the Supreme Court revisited its requirement the
prosecution prove that the tipper received a personal benefit from, or in exchange for,
the provision of inside information.
Writing on behalf of the court, Justice Samuel A. Alito Jr. limited the holding in the 2nd U.S. Circuit
Court of Appeals controversial decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014),
which appeared to raise the burden for satisfying the personal benefit requirement.
Specifically, Newman interpreted Dirks to find that prosecutors must provide evidence of a benefit
that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly
valuable nature. In the wake of Newman, numerous prior convictions and existing indictments
were called into question.
In Salman, however, the Supreme Court rejected Newman to the extent that its pecuniary or similarly
valuable nature standard required something more than evidence of a gift to family or friends.
The court reasoned, much as it did in Dirks, that even when the tipper receives no pecuniary benefit,
the tipper benefits personally because giving a gift of trading information is the same thing as
trading by the tipper followed by a gift of the proceeds.
Thus, it again concluded that the elements of fiduciary duty and exploitation of non-public
information exist when an insider makes a gift of confidential information to a trading relative or
friend.

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TRADING RELATIVE OR FRIEND
The Salman decision is a clear victory for prosecutors. Still, it is important to note that the
Supreme Court did not adopt the governments attempt to expand insider trading liability to gifts
to anyone, and instead limiting liability only to gifts to a trading relative or friend, as articulated
in Dirks.
Nonetheless, Salman begs the question: who is a trading relative or friend? Or, more importantly,
what evidence is needed to prove a trading relative or friend?
The court did not provide clear guidance as to what degree of friendship is sufficient to support a
conviction. However, Justice Alito may have provided hints of a definition.
Stepping back from the facts of Salman, the Court held that the test for insider trading liability
is whether the insider personally will benefit, directly or indirectly, from his disclosure. Thus, the
disclosure of confidential information without personal benefit is not enough.
Consistent with case law prior to Salman, the court thus appears to suggest that a trading
relative or friend likely requires evidence of a relationship close enough to warrant the inference
that the insider also received some ancillary benefit or at least an anticipated benefit.

Despite calls to reform


insider trading laws,
the Supreme Court chose to
do little more than modestly
restate the holding in its
1983 opinion in Dirks v. SEC.

EVIDENCE OF A RELATIONSHIP?
Courts prior to Salman have consistently looked for evidence of a relationship with characteristics
suggesting the possibility of indirect repayment flowing from the tippee. In SEC v. Sargent, 229
F.3d 68 (1st Cir. 2000), for instance, the 1st Circuit found a consultant and his dentist civilly liable
for insider trading after the consultant, while at dinner, tipped the dentist about an imminent
merger.
Although seemingly a generous gift lacking any obvious quid pro quo, testimony revealed that
that the dentist regularly provided the consultant with important networking contacts. The 1st
Circuit found such circumstantial evidence allowed the jury to infer a personal benefit.
In contrast, in SEC v. Maxwell, 341 F. Supp. 2d 941 (S.D. Ohio 2004), a district court dismissed
insider trading charges against an executive and his barber who never socialized outside the
barbershop or had any history of exchanging personal favors.
According to the court, because Dirks requires an intended benefit of at least some consequence,
the evidence was insufficient to establish a close enough relationship for insider trading liability.

NO OPPORTUNITY TO CLARIFY?
The facts in Salman, unfortunately, did not provide much of an opportunity to clarify the line that
separates cases like Sargent from cases like Maxwell. In Salman the Supreme Court was faced
with a very close relationship between brothers, and facts indicating that the tipper provided
information in place of cash in at least one instance.
Unsurprisingly, the Court found that a gift of information in that context is the same thing as
trading by the tipper followed by a gift of the proceeds.
Worse still, the language used by the court in Salman suggests that a gift of information to
a barber would, contrary to the decision in Maxwell, give rise to liability to the extent that it is
indistinguishable from payment of a cash tip, despite the lack of any social relationship between
the barber and the tipper.

CONCLUSIONS
In sum, in the wake of Salman, the non-anonymous provision of inside information to any trading person,
regardless of the nature or extent of the relationship between the tipper and the tippee, will be viewed by
civil and criminal regulators alike as sufficient to establish insider trading. Whether any future court will
be willing to limit or define the requisite degree of friendship remains to be seen.

2 | DECEMBER 27, 2016 VOLUME 32 ISSUE 13


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2016 Thomson Reuters

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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. This publication was created to provide you with accurate and authoritative information concerning the subject matter
covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not
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West.Thomson.com.

2016 Thomson Reuters

DECEMBER 27, 2016

VOLUME 32

ISSUE 13 | 3

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