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Dec. 6 — The U.S. Supreme Court’s unanimous insider trading decision in Salman v. United States was good news for the government, but the narrow and unambiguous facts of the case mean it may have a limited impact on future enforcement, lawyers told Bloomberg BNA.
The justices upheld the conviction of onetime Chicago grocery wholesaler Bassam Yacoub Salman, who traded on tips he got from a friend, who in turn was given the information by his brother, a Citigroup executive. The high court concluded that the executive obtained the required “personal benefit” for tipping his brother to the inside information, even though he didn’t get anything tangible in return.
The decision is “extremely narrow,” New York lawyer Gregory Morvillo, Morvillo LLP, told Bloomberg BNA. He said the opinion only reaffirms something the Supreme Court set out in Dirks v. SEC many years ago that a gift to a trading relative allows for an inference of personal benefit.
The Salman decision doesn’t specifically address friendship or other types of relationships, he said. It also leaves untouched the U.S. Court of Appeals for the Second Circuit’s conclusion in United States v. Newman that prosecutors must prove the insider received a personal benefit and that the tippee knew of the benefit, Morvillo said.
Morvillo represented one of two former hedge fund executives whose convictions were overturned in Newman.
Former SEC enforcement lawyer Stephen J. Crimmins, Murphy & McGonigle LLP, New York said the Salman court found the circumstances consistent with its 1983 Dirks decision.
However, Crimmins noted, the justices also recognized that personal benefit determinations won’t always be as easy as in Salman, a relatively straightforward case. The more the government is able to show a close relationship between the tipper and the initial tippee, the more likely it is to meet the personal benefit requirement, Morvillo told Bloomberg BNA.
“The Court held that intangible benefits could be enough for insider trading liability, but was clear they might not always be enough,” Boston lawyer Ian Roffman, Nutter McClennen & Fish LLP, told Bloomberg BNA in an e-mail.
Roffman predicted that in the wake of the decision, Securities and Exchange Commission insider trading investigations “are likely to be very fact-intensive and probing, especially into the personal and professional relationships between tippers and tippees.”
“For now, we’re back in the pre-Newman world,” Roffman, a former SEC enforcement lawyer, said. “Any kind of professional relationship could potentially give rise to liability if some type of indirect benefit was provided in exchange for inside information. The Court hinted that brighter lines could be drawn in the future, but it refused to do so now.”
Nevertheless, former prosecutor David Miller, Morgan Lewis & Bockius LLP, New York, said Salman is a “big victory” for the prosecution and will have a significant impact on future enforcement cases.
Miller said the ruling “puts to bed a source of confusion” in the lower courts regarding whether a personal benefit must have a pecuniary value for insider trading purposes.
Miller also noted that while the tipster in Salman conveyed the information to his brother with whom he was close, many of the Wall Street insider trading cases against downstream tippees began with tips between friends and relatives. The decision “restores some of the power to bring claims against tippees that the Government lost in the wake of Newman,” Michael MacPhail, a former SEC enforcement lawyer, told Bloomberg BNA in an e-mail. MacPhail, of Faegre Baker Daniels LLP, Denver, said the decision “is likely to embolden prosecutors, even under the Trump administration.”
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