The Supreme Court has agreed to consider something that lies at the center of nearly every insider trading case: what prosecutors need to prove to win an insider trading conviction. This case aims to determine exactly what benefits corporate insiders need to receive for tips they disclose to traders to be illegal. It is expected to resolve a split in federal appeals courts and will review a July ruling regarding trades made by Bassam Salman from the California-based 9th U.S. Circuit Court of Appeals. Specifically, the court will review whether prosecutors had to prove that Salman’s brother-in-law, Maher Ara, a Citigroup investment banker, disclosed the information in exchange for a personal benefit.
Salman was convicted in 2014 and received a three-year sentence. On appeal, Salman relied upon the recent decision in the U.S. Court of Appeals for the 2nd Circuit, United States v. Newman (Newman), to challenge his conviction. The 9th Circuit rejected the 2nd Circuit’s reasoning in Newman and upheld the conviction.
Both appeals courts interpreted the Supreme Court precedent of Dirks v. Securities and Exchange Commission (Dirks), which required proof that the insider “directly or indirectly” gained something from the initial disclosure. The 2nd Circuit narrowly interpreted Dirks and required “proof of a meaningfully close personal relationship that generates an exchange that it is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” In Salman’s case, the 9th Circuit concluded that insider trading occurs “when an insider makes a gift of confidential information to a trading relative or a friend.”
Interestingly, the 9th Circuit’s decision was written by U.S. District Judge Jed S. Rakoff, a trial judge in Manhattan who was sitting by designation on the 9th Circuit. Rakoff had previously expressed concern about the 2nd Circuit’s ruling in Newman, although as a judge in that circuit, he was required to follow Newman.
The Supreme Court’s announcement came as a surprise to many commentators due to the fact that the Justices in October had declined to review the Newman case, despite a request from the Department of Justice (DOJ). By contrast, the DOJ had urged the high court to turn down Salman’s appeal of the 9th Circuit’s decision and uphold his conviction. The Supreme Court declined to accept the DOJ’s position on both cases.
The Supreme Court gave no reason for agreeing to hear Salman’s appeal. Oral arguments on the case could be heard as early as April, 2016. Salman has been serving his prison sentence since August, 2014.