Supreme Court to Rule on Scope of Insider Trading Following Record Year for SEC Enforcement Actions
The Securities and Exchange Commission announced this week that fiscal year 2016 was a record year for the filing of SEC enforcement actions. Among the 868 enforcement actions filed were a record 160 cases involving investment advisers or investment companies and 98 standalone cases involving investment advisers or investment companies (also a single year record). According to the SEC, the Enforcement Division also tallied a record high number of Foreign Corrupt Practices Act (FCPA) actions (21) and also set a record for money awarded to whistleblowers ($57 million). The combined enforcement efforts netted over $4 billion worth of disgorgement and penalties. These enforcement efforts seem to signal that the SEC will continue to focus on a number of priority areas including: holding issuers and gatekeepers, i.e., attorneys and accountants, responsible for wrongdoing; using “data and analytics” to identify insider trading schemes; investigating alleged misconduct by investment advisers and companies; combatting microcap and other fraudulent schemes; and “policing the public finance markets.”
As white collar practitioners are aware, this aggressive enforcement era also gives rise to an increased risk of parallel criminal investigations and prosecutions by the Department of Justice. Against this backdrop, the United States Supreme Court heard oral arguments on October 5th in the case of Salman v. United States. This case involves Bassam Salman, a Chicago grocery wholesaler, whose conviction for the crime of insider trading based on his receipt of stock tips from an extended family member was upheld by the United States Court of Appeals for the Ninth Circuit. The government alleged that Salman traded on the inside information and profited from those trades. He was convicted following a jury trial. The tips were secondhand in nature, in that Salman did not receive them directly from the “insider,” a brother-in-law who was an investment banker, but rather Salman received them from the brother of the insider. The crucial issue in the case is what type of personal benefit was received by the tipping insider, who did not receive anything of pecuniary value from his brother, in exchange for the disclosure of inside information. A summary of the oral arguments can be found here.
In criminal prosecutions for insider trading in violation of Section 10(b) of Securities and Exchange Act of 1934, the Supreme Court previously held in SEC v. Dirks that the government must prove that the tipper received a direct or indirect benefit for his disclosure. That hurdle was routinely met by the government in its insider trading prosecutions until 2014 when the United States Court of Appeals for the Second Circuit vacated insider trading convictions for two traders who were downstream recipients of inside information on computer company Dell’s financial performance. In that case, United States v. Newman, the Second Circuit held that the government failed to provide sufficient proof that the tipping insider received a personal benefit. In Newman, the government unsuccessfully argued that even though traders Newman and Chiasson did not receive information from a corporate insider, it was sufficient for the jury to convict based on the alleged friendship between the insider and the initial tippee and that the inside information had been disclosed in the breach of a duty. As a result of Newman, the current state of the law of insider trading, in the Second Circuit at least, is that the government must prove “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” 773 F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (Oct. 5, 2015). The Ninth Circuit, of course, did not impose this personal benefit standard when affirming Salman’s conviction.
In light of this uncertainty, the Supreme Court will decide, in Salman, whether the government must prove a personal benefit on par with that announced by the Second Circuit in Newman, or whether it is “enough that the insider and the tippee shared a close family relationship.” The government argued that the mere gift of inside information to a family member is a sufficient personal benefit to the tipping insider. Numerous interested parties and organizations have submitted amicus curiae, or “friend of the Court,” briefs for the Supreme Court to consider in rendering its opinion including: the Securities Industry and Financial Markets Association (SIFMA) (not supporting either party); the National Association of Criminal Defense Lawyers (NACDL) (in support of Salman); the Cato Institute (in support of Salman); and Mark Cuban (in support of Salman). Those filing in support of the petitioner Salman argue, among other things, that Congress not the Court should more clearly define what constitutes insider trading so that traders, and their friends and family, have sufficient notice of what the law requires and to reign in what they perceive to be novel and arbitrary enforcement activity by the government.
A defense win in Salman would certainly spell relief for remote tippees, often friends and family members of corporate insiders or industry professionals, who have increasingly found themselves in the crosshairs of the SEC and DOJ in recent years. The Court is not expected to issue an opinion until 2017. Whatever direction the Supreme Court chooses to take, securities and financial industry professionals should continue to expect aggressive and coordinated enforcement activity by the SEC and DOJ.
For more information, please contact Matt Mueller at firstname.lastname@example.org or 813.347.5142. Matt is a former federal prosecutor in Washington D.C. and Tampa focusing his practice on the defense of white collar, securities, and tax matters.