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December 6, 2016

SCOTUS unanimously upholds broad interpretation of insider trading in Salman

The Supreme Court handed down this morning its first significant criminal justice ruling of the Term via a unanimous decision in Salman v. US, No. 15-628 (S. Ct. Dec. 6, 2016) (available here).  Here is how the opinion authored by Justice Alito for a unanimous court gets started:

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit undisclosed trading on inside corporate information by individuals who are under a duty of trust and confidence that prohibits them from secretly using such information for their personal advantage.  48 Stat. 891, as amended, 15 U.S.C. § 78j(b) (prohibiting the use, “in connection with the purchase or sale of any security,” of “any manipulative or deceptive device or contrivance in contravention of such rules as the [Securities and Exchange Commission] may prescribe”); 17 CFR § 240.10b–5 (2016) (forbidding the use, “in connection with the sale or purchase of any security,” of “any device, scheme or artifice to defraud,” or any “act, practice, or course of business which operates . . . as a fraud or deceit”); see United States v. O’Hagan, 521 U.S. 642, 650–652 (1997).  Individuals under this duty may face criminal and civil liability for trading on inside information (unless they make appropriate disclosures ahead of time).

These persons also may not tip inside information to others for trading. The tippee acquires the 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.  In Dirks v. SEC, 463 U.S. 646 (1983), this Court explained that a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit.  And, we went on to say, a jury can infer a personal benefit — and thus a breach of the tipper’s duty — where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” Id., at 664.

Petitioner Bassam Salman challenges his convictions for conspiracy and insider trading.  Salman received lucrative trading tips from an extended family member, who had received the information from Salman’s brother-in-law.  Salman then traded on the information.  He argues that he cannot be held liable as a tippee because the tipper (his brother-in-law) did not personally receive money or property in exchange for the tips and thus did not personally benefit from them.  The Court of Appeals disagreed, holding that Dirks allowed the jury to infer that the tipper here breached a duty because he made a “‘gift of confidential information to a trading relative.’” 792 F.3d 1087, 1092 (CA9 2015) (quoting Dirks, supra, at 664).  Because the Court of Appeals properly applied Dirks, we affirm the judgment below.

December 6, 2016 at 10:59 AM | Permalink

Comments

Man o man is this bad news for the racquetball industry...

Posted by: Just passing through | Dec 6, 2016 12:02:30 PM

Insider trading is good for the economy. The lawyers, such as the Justices, kill $billions a year in value. This awful decision is an example of their destructiveness.

Posted by: David Behar | Dec 6, 2016 12:53:11 PM

Jpt, I think Hollywood has confused you: in movies tipping takes place while the 1% plays racquetball. But in real life, squash is the only respectable game for sharing insider info.

Posted by: Doug B. | Dec 6, 2016 1:15:28 PM

Who the hell names a game after a vegetable?! More of this vegan craziness.

Posted by: just passing through | Dec 6, 2016 8:56:37 PM

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