In the Courts

The U.S. Supreme Court issued its ruling in Salman v. United States (No. 15-628) on Dec. 6, 2016, clarifying previously conflicting circuit-level precedent setting forth the “personal benefit” test related to insider trading. According to the SEC, “[i]llegal insider trading refers generally to buying and selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in the possession of material, nonpublic information about the security. Insider trading violations may also include 'tipping' such information, securities trading by the person 'tipped,' and securities trading by those who misappropriate such information.”

As articulated by the Supreme Court in Salman, a “tippee acquires a tipper's duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper's duty and the tippee may commit securities fraud by trading in disregard of that knowledge.” The Court's opinion in Salman is premised on its interpretation of its 1983 decision in Dirks v. SEC, 463 U.S. 646, in which the Court held that a tippee trading inside information is liable when “the insider personally will benefit, directly or indirectly, from his disclosure.” Pursuant to Dirks, courts must “focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings.” The Court in Dirks continued, “[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.”