Clarity the Big Wish in Insider Trading Case

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Rob Tricchinelli

Oct. 7 — Lawyers are hoping for relief from a cloudy legal landscape as the U.S. Supreme Court decides its first major insider trading case in nearly two decades.

The high court heard oral argument Oct. 5 in Salman v. United States, in which it must determine what type of benefit an insider must receive for someone who trades on the insider's tip to be liable for insider trading.

“I think everyone would appreciate clarity,” Donna M. Nagy, a professor at Indiana University's Maurer School of Law, told Bloomberg BNA in an Oct. 7 phone interview.


The justices tested the government and an attorney for Bassam Yacoub Salman, who was asking the court to review his insider trading conviction, with several hypothetical situations over how to define that benefit.

It was a “great example” of the Supreme Court probing the outer limits of both sides' arguments and seeing how they would stand up in unusual factual circumstances, William R. Peterson, a partner at Morgan, Lewis & Bockius LLP in Houston, told Bloomberg BNA in a phone interview.

“Line-drawing is clearly on their minds on how to formulate the types of disclosures that will be construed as fraudulent tips,” Nagy said.

Personal Benefits?

The justices weighed several court decisions that attempt to define how the government can bring insider trading cases, despite the lack of a federal statute directly on the matter.

Among them was the 1983 case Dirks v. SEC, which held that a person can't be liable for insider trading unless the insider who passed along the information received a “personal benefit” from disclosing it.

Dirks provided a framework for most cases until the U.S. Court of Appeals for the Second Circuit in United States v. Newman in 2014 required that prosecutors prove an insider received a concrete benefit. Salman's attorney urged the court to apply a similar standard.

The justices didn't agree to hear an appeal from prosecutors in Newman, but they did take up Salman's appeal.

He was convicted for trading on inside information initially conveyed by a former Citigroup investment banker to his brother. The Ninth Circuit said the tips were intended as a gift, which was enough of a personal benefit to uphold Salman's conviction.

The government asked the court to hold that passing along any information could be subject to insider trading liability if the tipper knew it would be traded on.

‘Extremely Specific Language.'

“We would like clarity,” John F. Sylvia, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Boston, told Bloomberg BNA in a phone interview. “ Newman went farther than a lot of practitioners, including me, would’ve thought.”

The justices “were concerned or at least questioning whether [Salman's] position strays from Dirks,” he said.

During the argument, Justice Elena Kagan said Salman's attorney was “asking us to ignore some extremely specific language in Dirks, which of course, was decided quite some time ago.”

While Newman isn't exactly at issue in Salman's case, the court's ruling could tilt the playing field back toward prosecutors and civil enforcers if it affirms the conviction based on a standard less exacting than Newman.

Familial Relationship

The original tip was between brothers, which could prove to be stronger evidence of a personal benefit than a tip between coworkers or other parties who aren't as close.

The relationship between two brothers “did not seem to create murkiness questions for most of the justices,” Nagy said.

“It gets murky, say, if it’s coworkers who don’t know each other very well,” Sylvia said.

At least one justice seemed willing to draw the line there.

“Things might look different if we had a case that was not a relative or friend,” Kagan said at the argument. “And why not separate out that strange, unusual, hardly-ever-prosecuted situation and say we're not dealing with that here? We have nothing to say about it.”

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.