The 9th Circuit just denied rehearing en banc in a closely watched decision that declined to adopt a broad interpretation of its influential sister circuit’s watershed opinion in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which raised the bar for criminal prosecutions in tipper/tippee insider trading cases. A previous post discussing this case can be found here. In United States v. Salman, No. 14-10204 (9th Cir. July 6), reh’g denied (Aug. 13, 2015), Senior Judge Jed S. Rakoff of the Southern District of New York, sitting by designation, wrote for the 9th Circuit panel that a tippee (i.e., a person who knowingly receives material, nonpublic information from a source who is bound by a duty of confidentiality (i.e., a tipper)) could be held liable for insider trading even without proof that the tipper expected any pecuniary or similarly valuable personal benefit in exchange for providing the information. In the process, Judge Rakoff narrowly construed Newman, a recent major precedent from his home circuit, which, given the 2nd Circuit’s volume of insider trading prosecutions, had appeared to many to signal a judicial retreat from expansive remote-tippee liability.
Appellant Bassam Salman was convicted of conspiracy and insider trading following a jury trial, based on trades that Salman (the tippee) made using material, nonpublic information he obtained from a friend (the intermediary tippee), who, in turn, had obtained the information from his brother (the tipper). On appeal to the 9th Circuit, Salman argued that the 9th Circuit should adopt his interpretation of the 2nd Circuit’s December 2014 Newman holding and declare the evidence insufficient to sustain his conviction, because there was no evidence that the tipper-tippee relationship was sufficient to give rise to a breach of the tipper’s fiduciary duties, since the tipper never received a “pecuniary or similarly valuable” benefit from the tip.
The 9th Circuit rejected Salman’s argument, holding that there was sufficient evidence that the tipper received a “personal benefit” from the direct tippee within the meaning of the Supreme Court’s landmark tippee-liability case, Dirks v. S.E.C., 463 U.S. 646 (1983). See Slip Op. at 10 (Dirks “governs this case.”). Dirks held, among other things, that a tippee can be held liable as part of an insider trading prosecution “when an insider makes a gift of confidential information to a trading relative or friend.” Id. at 10. In the 9th Circuit’s view, that is the only “personal benefit” necessary to prove a breach of the tipper’s fiduciary duty—and thus to give rise to Salman’s insider trading liability as a remote tippee.
Salman protested that Newman had properly clarified Dirks to mean that the “personal benefit” standard could not be satisfied “by the mere fact of a friendship, particularly of a casual or social nature,” Slip Op. at 12-13 (quoting Newman, 773 F.3d at 442-443); or, otherwise, every relationship would satisfy the “personal benefit” test, and tippee liability would be unlimited. Rather, relying on Newman, Salman argued that there must exist a relationship leading to an exchange representing “at least a potential gain of pecuniary or similarly valuable nature.” Id. However, the 9th Circuit disagreed: “To the extent Newman can be read to go so far, we decline to follow it.” Id. at 13. Rather, “[p]roof 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 element of insider trading,” with no proof of something resembling a “pecuniary” benefit necessary. Id. at 14.
Salman represents a potential setback for criminal defendants facing remote tippee charges, and a fresh incentive for prosecutors to aggressively pursue insider trading charges against tippees one or more levels removed from the original tipper—at least outside of the 2nd Circuit. Although the 9th Circuit denied rehearing en banc without dissent, in light of the 9th Circuit’s disagreement with the 2nd Circuit’s high-profile Newman opinion, the stage is set for a possible Supreme Court certiorari petition later this fall.