It’s Personal—High Court to Consider Needed Benefit in Insider Trading Cases

Supreme CourtAlexandra A. E. Shapiro returns to the U.S. Supreme Court Oct. 5, where she once clerked for Associate Justice Ruth Bader Ginsburg, to argue a pivotal insider trading case. The high court will consider the scope of the personal benefit requirement for tippers with regard to the culpability of remote tippees in its first insider trading case in a generation.

Shapiro will argue on behalf of Bassam Salman. The Ninth Circuit upheld Salman’s conviction and three-year prison sentence for trading on nonpublic information received from his brother-in-law. The case will have a significant impact on market regulation and the future of insider trading prosecutions. Unlike many insider trading cases, however, which often involve free-wheeling Wall Street traders defended by powerhouse law firms, this case revolves around a Chicago-area wholesale grocer and a lawyer from a boutique litigation firm with nine attorneys.

Shapiro, a veteran of the insider trading wars, is former partner at Latham & Watkins. She co-founded Shapiro Arato in 2009, and served as co-counsel for Anthony Chaisson in the U.S. v. Newman litigation. The Newman case established that prosecutors in the Second Circuit must show that the defendants knew the insider received a personal benefit in exchange for sharing the nonpublic information.

The Second Circuit in Newman noted the “doctrinal novelty” of the Justice Department’s recent insider trading prosecutions, which often targeted remote tippees many levels removed from corporate insiders. The panel stated that “for purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach.” Accordingly, the prosecution cannot establish that the defendant knew of the breach without showing that the tippee knew of the personal benefit received by the insider.

The appellate panel noted prior Second Circuit dicta in U.S. v. Jiau, 734 F.3d 147 (2d Cir. 2013), in which the court stated that "[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend." However, the court narrowed that language in Newman, stating that “[t]his standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.”

The Supreme Court declined to review Newman. The Salman case, however, presents a better vehicle for defining the scope of the required benefit, because unlike in Newman, the question of whether Salman knew of the breach and the source of the information is not an issue.

The Ninth Circuit rejected Salman’s argument that Newman stood for the proposition that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is always insufficient to demonstrate that the tipper received a benefit. According to the Ninth Circuit, “if Salman's theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.” It is sufficient in the Ninth Circuit under Salman to show that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend.

The short-handed Supreme Court may well play into the resolution of this case. Justice Scalia was a strong opponent of what he saw as the over-criminalization of regulatory statutes. In a statement accompanying a 2014 denial of certiorari, Justice Scalia urged courts “to resolve ambiguity in criminal laws in favor of defendants.” Whitman v. U.S., No. 14-29 (2014). If the court comes to another 4-4 deadlock, the Salman conviction will stand and the split between the circuits will continue.

The Court will hear oral argument on Wednesday, October 5.

For more information, see Boutique Lawyer to Argue Salman in High Court.