The Supreme Court speaks about insider trading, and it is not good for tippers and tippees.
I’m still going through the backlog of recent stuff. Here’s an important update on insider trading.
For the first time in a long time, the Supreme Court provided new guidance on insider trading laws. The government had suffered a few high-profile defeats in this area over the last few years, but Salman v. United States provided more insight into indirect liabilities for insider trading while providing more ammunition to the government to go after indirect (tippee) insider trading defendants.
In Salman, A was an investment banker in Citigroup’s healthcare investment banking group. Over time, he regularly tipped off B, his brother. B also provided the information to other people, including C, B’s friend who was also A’s brother-in-law. A tangled web and all that . . .
In the classic Dirks case, a tippee, in this case C, is exposed to liability to insider trading if the tippee participates in a breach of the tipper’s fiduciary duty. The test is whether the insider will benefit, directly or indirectly, from the disclosure. Disclosure without personal benefit is not enough. However, a close, personal relationship can create an inference of benefit.
In 2014, the Second Circuit in Newman, a case involving a more distant relationship between the traders and the insider information, did not permit the inference without proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.
The Ninth Circuit and the Supreme Court disagreed.
The Supreme Court said that the test is whether the insider personally will benefit, directly or indirectly, from the disclosure. Disclosure without personal benefit is not enough. However, the benefit can be inferred from objective facts and circumstances such as a relationship between the parties that suggests a quid or quo or intention to benefit the tippee.
The takeaway is that insider trading is not worth it. If caught, it is not that difficult to convict.* It just got easier. If the prosecution can show that there is a close enough relationship between the tipper and tippee, a jury can infer a benefit assuming that the transaction is no different than the tipper doing the trading and gifting the proceeds to the tippee.
*Sort of. There are some pending articles about some more difficult cases for the SEC and prosecutors.