Back in October, our blog discussed how the Supreme Court of the United States was hearing oral arguments in Salman v. U.S., marking the first time in roughly two decades that it tackled the highly controversial and not always unambiguous topic of insider trading.
In recent developments, the nation’s high court reached a unanimous decision last month that it says will “easily resolve” the longstanding question as to what is or isn’t considered insider-trading going forward.
To recap, the Salman case involved an Illinois man who allegedly made over $1.5 million in stock trades using inside information.
Specifically, it was alleged that the defendant’s brother-in-law received a tip from his own brother, an employee of Citigroup Inc., about deals involving the megabank’s clients. He then went on to share this same information with the defendant, who acted on it via a series of profitable trades.
Salman was ultimately convicted on securities fraud and conspiracy charges, and sentenced to several years in prison.
The issue ultimately before the eight justices in the Salman case was whether prosecutors must demonstrate that the tipper received some sort of tangible benefit — money or anything of value — in exchange for the information in order to secure a conviction.
Up to that point, the matter had created considerable conflict. That’s because the New York-based 2nd U.S. Circuit Court of Appeals held that such a tangible benefit must be demonstrated in order for insider trading convictions to stand, while the San Francisco-based 9th U.S. Circuit Court of Appeals rejected this holding, finding that it would encourage corporate insiders to enrich family and friends so long as they received nothing in return.
In a decision handed down last month, the eight justices sided with the 9th Circuit, holding that the benefit received by the tipper needn’t be “something of a pecuniary or similarly valuable nature.”
Here, the court relied on Dirks v. SEC, the seminal 1983 case establishing that prosecutions for insider trading could derive from any breach of duty to company shareholders and that the defendant insider (i.e., tipper) had to receive a “personal benefit” from their disclosure.
“Dirks specifies that when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift,” wrote Justice Samuel Alito. “In such situations, 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.”
In other words, SCOTUS held the mere act of supplying someone with inside information can result in criminal liability. By way of example, consider a scenario in which a CFO for a major corporation divulges confidential information to an old college friend over lunch, with the college friend ultimately profiting from this confidential information. Here, both can be held criminally liable — despite no money or gifts changing hands.
If you are under investigation or have been arrested on white collar crime charges, Consider speaking with an experienced legal professional as soon as possible.