Professional Documents
Culture Documents
CORPORATE OFFICERS
& DIRECTORS LIABILITY
Litigation News and Analysis Legislation Regulation Expert Commentary
EXPERT ANALYSIS
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.
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.
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
engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal
or other expert advice, you should seek the services of a competent attorney or other professional. For subscription information, please visit www.
West.Thomson.com.
VOLUME 32
ISSUE 13 | 3