In an opinion issued July 6, 2015, a Ninth Circuit panel affirmed the insider trading conviction of Bessam Salman in the case captioned United States v. Salman, No. 14-10204 (9th Cir.). The opinion is relatively straightforward, but is noteworthy for two reasons. First, it is written by Southern District of New York Judge Jed Rakoff, who seems to attracting insider trading cases of late, and has written several opinions interpreting and applying the Second Circuit U.S. v. Newman decision. Second, the defendant-appellant argued that the Newman opinion supported reversal of the conviction, which gave Judge Rakoff another chance to state his views on Newman. The opinion can be read here: U.S. v. Salman.
The opinion does little to advance the interpretive analysis of the Newman decision because it is governed directly by the Supreme Court holding in Dirks v. SEC, 463 U.S. 646 (1983). In fact, Judge Rakoff says so in no uncertain terms: “Dirks governs this case.” Slip op. at 10. The only real comment Judge Rakoff makes on Newman is that if Newman held that a personal gift of material inside information from a tipper breaching a fiduciary duty of confidentiality to a tippee with whom he has a close relationship, for the specific purpose of enriching the tippee, was insufficient to support a conviction, then “we decline to follow it.” Slip op. at 13. Since Newman never suggested such a result – which would be plainly contrary to the Dirks opinion – there is no distance between the Salman and Newman opinions.
As Judge Rakoff notes, the facts in Salman and Newman are very different. In particular, in Newman, the evidence showed no intention by the original sources of the inside information to confer a benefit on a close friend or relative by improperly communicating the inside information. In Salman, however, the evidence in the record was exactly the opposite. The tipping brother testified “that he gave [his brother] the inside information in order to ‘benefit him’ and to ‘fulfill whatever needs he had.’” Slip op. at 5.
The Dirks opinion plainly included this in its description of unlawful tipping, as quoted by Judge Rakoff: “[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.” Slip op. at 10, quoting Dirks, 463 U.S. at 664.
Some may contend that Salman rejects the concept of a “personal benefit” to the source in the nature of a “quid pro quo” as a prerequisite for tippee liability, referred to in Newman. See, for example, Ninth Circuit Disagrees with Second Circuit on Personal-Benefit Requirement for Insider Trading. That is not how I read either Salman or Newman. Newman never questioned that the required benefit to the tipper could be a non-monetary one — like the benefit of directing wealth to a close friend or relative you want to benefit from being more wealthy — it just found the evidence of such a benefit insufficient in that case because the mere fact of providing information, with no evidence that it was to fulfill the tipper’s desire to transfer wealth, was “too thin” to support finding a benefit to the tipper. And Salman plainly finds, and emphasizes, the strong evidence in the case of a benefit to the tipper in the form of intentionally directing wealth to a beloved relative.
There can be no doubt that the Newman court never rejected that holding in Dirks. Instead, it tried to apply the Dirks holding to the evidence presented in Newman, which the court found insufficient to show any personal benefit derived by the sources from their “tips” because “the mere fact of a friendship, particularly of a casual or social nature” was not enough to prove a intent to benefit the tippee. Slip op. at 12-13, quoting Newman, 773 F.3d at 452. The Newman court found the “circumstantial evidence” in that case “too thin to warrant the inference that the corporate insiders received any personal; benefit in exchange for their tips.” Slip op. at 13, quoting Newman, 773 F.3d at 451-52. That obviously does not describe the evidence of benefit presented in Salman, which was neither circumstantial nor thin because the source himself described the pleasure he took in giving the gift of information to his brother. See slip op. at 11 (testimony from the source and his tippee, who were brothers, showed that the tipping brother “intended to ‘benefit’ his [tippee] brother and to ‘fulfill whatever needs he had’”).
If Salman stands for anything meaningful, it is that it shows that Newman was not a meaningful departure from existing insider trading law, but rather a ruling that there are limits to how far the Government can stretch mere casual friendships or acquaintances to prove a transfer of information was intended as the “gift of confidential information” described in Dirks. In short, the sky did not start falling when the Newman opinion was adopted. See DOJ Petition for En Banc Review in Newman Case Comes Up Short.
Judge Rakoff’s Salman opinion concludes: “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. Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.” Slip op. at 14. Newman never suggests any different result.
July 6. 2015
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