Business & Corporate Articles

United States Supreme Court Expands the Definition of “Benefit” in Insider Trading

Insider trading has been defined slowly over the years by judicial interpretation of agency rules and enforcement decisions. In November of 2017, the Supreme Court took another opportunity to shape the scope of insider trading jurisprudence, in Salman v. United States (137 S. Ct. 420 (2016). The question assessed was how far down the chain of disclosure tipper-tippee liability extended, and the definition of “personal benefit.”

Dirks v. SEC previously defined insider trading liability, requiring the existence of a “financial relationship.” Dirks v. SEC, 463 U.S. 646, 664. The disclosure at the heart of Salman stemmed from Salman’s brother-in-law, Maher Kara, innocently discussing the healthcare industry with his brother Michael, who had expertise in chemistry; however, Michael began to trade on the information, and Michael took the opportunity to share the information with several friends, including Salman.

Salman argued that the tips he received were not subject to tippee liability because the tips he received were not in exchange for compensation or a tangible return. A jury in the Northern District of California and the Ninth Circuit held that this kind of conduct was proscribed by Dirks. Furthermore, Salman’s argument that his tip was innocuous did not sway the Justices. The ruling clearly intended to extend the protection of everyday shareholders, and stem the flow of insider information. The Court’s ruling highlighted that tipping was not innocuous, as it enabled Salman to profit only because of the disparate advantage of knowing inside information, i.e., “a gift of confidential information.”

The case has major implications for financial professionals, as well as attorneys in the business space. While our duties of confidentiality and ethics surely weigh on all attorneys, Salman teaches us that we must never allow insider information to offer an unfair advantage. While one could argue that Salman is more applicable to tippee liability, the lesson applies equally to those entrusted with the power of knowledge of privileged information.

-- Phillip Stephan is an associate attorney at Neil, Dymott, Frank, McFall, McCabe & Hudson.

**This article is for information purposes only and does not contain or convey legal advice.  The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting an attorney. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**