DEFINING PERSONAL BENEFITS: SUPREME COURT TO REVISIT INSIDER TRADING STANDARDS AFTER 33 YEARS
By Dennis A. Stubblefield, Jessica L. Mackaness, Esq., and Paris Novinni of Shustak Reynolds & Partners, P.C.
“The distinction between pure altruism and self-interest has puzzled philosophers for centuries; there is no reason to believe that courts and administrative law judges will have an easier time with it.” 33 years after Justice Blackmun penned those prophetic words in his dissenting opinion in Dirks v. SEC, the U.S. Supreme Court has accepted an Illinois man’s petition to have his insider trading conviction reviewed and will again address this distinction.
Salman v. U.S. will address the controversial question of what exactly constitutes a “personal benefit” for purposes of insider trading liability, a subject that continues to confound many of those involved in countless insider trading investigations decades after the seminal Dirks was decided. Dirks held that an insider must “personally . . . benefit, directly or indirectly, from his disclosure”; absent some personal gain, there is no breach of duty, and thus no insider trading. While Dirks remains good law, courts have often struggled to define the parameters of its holding.
In July, the Ninth Circuit upheld Bassam Salman’s conviction for insider trading; Salman was convicted of trading on inside information he had learned from his wife’s brother-in-law (and Salman’s close friend), Michael Kara, who was originally tipped repeatedly by his own brother, Maher Kara, a former investment banker. Salman was sentenced to three years in prison. He argued that the government adduced no proof that Maher Kara, as the insider, had received any significant personal benefit from disclosing the information to his brother, Michael Kara.
The Ninth Circuit held that Maher Kara’s gift of confidential information to his brother was sufficient to meet the personal benefit requirement of Dirks simply due to the familial connection, despite the fact that in U.S. v. Newman, the Second Circuit had recently held that a close relationship between the tipper and tippee, without more, was insufficient to meet the standard. Newman overturned the insider trading convictions of two hedge fund managers who received material nonpublic information from public companies via an extended tipping chain through their professional network.
The Supreme Court is taking up the case just months after it rejected the U.S. government’s petition of the Newman decision, which was seen as raising the bar on prosecutors because it forces them to show that a tipper received a significant, potentially pecuniary, benefit “of consequence” in exchange for their inside information.
This case will be the Supreme Court’s first review of tipper-tippee liability since Dirks, and will give the justices the ideal opportunity to clarify what the government needs to show when it comes to the personal benefit element. With any luck, the Supreme Court will go further and take a fresh look at what insider trading is all about, and under what circumstances trading that is other than pristinely-pure-of-heart and solely executed on an equal-access-for-all ultra-level playing field should be deemed illegal.
In his petition, Salman has asked the court to resolve the circuit split, and answer whether there always needs to be an exchange of substantial personal benefit in tipper and tippee cases, or rather, if it is enough for an insider to simply have a close family relationship with the alleged tippee. Either way, the decision will undoubtedly have an enormous impact on the landscape of insider trading law.