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From Securities Regulation Daily, January 19, 2016

Justices to mull personal benefit in post-Newman insider trading case

By Mark S. Nelson, J.D.

The Supreme Court will try to clarify the degree to which the government must prove a personal benefit in insider trading cases now that the justices have agreed to hear a Ninth Circuit case that opted not to follow the Second Circuit’s more stringent Newman test. Bassam Salman’s petition for a writ of certiorari had raised two questions, but oral argument in the case will be limited to the Newman issue, according to the court’s order. The high court had begun its current term by declining the government’s request for the justices to review Newman (Salman v. U.S., November 10, 2015).

Follow Newman or Dirks? Salman was convicted by a jury of conspiracy and insider trading. He allegedly received material, nonpublic information about companies via two brothers, one of whom worked for the healthcare investment banking group of a large bank, and to whom he would later become related by marriage. The investment banker brother supposedly gave into his sibling’s demands for inside information, which the sibling then passed to Salman. Salman arranged to make the related trades through a brokerage account held by his wife’s sister and her husband; Salman gave the information to the husband and Salman and the husband were to split any profits.

The Ninth Circuit, in a published opinion written by Judge Jed Rakoff of the Southern District of New York, who sat by designation, held that the evidence presented at Salman’s trial was sufficient to uphold his conviction. Salman had urged the court to apply Newman, which seemingly grafted tougher language (“…proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature”) to the Supreme Court’s Dirks opinion, which said “[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.”

While noting that Newman was not binding on the Ninth Circuit, Judge Rakoff also said the Second Circuit’s latest pronouncement on insider trading could not be “lightly ignore[d].” Still, the Ninth Circuit disagreed with the breadth of Salman’s claim that Newman required a tangible benefit beyond mere friendship or familial relationship. According to the Ninth Circuit, even if Newman goes that far, the court need only follow the “clear holding” in Dirks that a gift of confidential information to a trading relative or friend is enough to show breach of fiduciary duty.

A separate unpublished opinion in the case rejected Salman’s numerous other arguments, including that the district court erred by giving a deliberate ignorance instruction. Salman had urged the Supreme Court to consider whether a failure to investigate suspicious circumstances alone can amount to the deliberate actions needed to show willful blindness. But the Supreme Court’s certiorari grant is limited to the Newman/Dirks issue.

Defining insider trading. The Supreme Court’s decision in Salman could impact legislation that would define insider trading. Three bills introduced in Congress last year in response to the Second Circuit’s Newman decision would clarify what it means to trade on inside information (H.R. 1625H.R. 1173S. 702). But progress on these bills may have to wait for the high court’s Salman opinion and the resolution of this year’s presidential and congressional elections.

The case is No. 15-628.

Attorneys: John D. Cline (Law Office of John D. Cline) for Bassam Salman.

Companies: Citigroup Inc.

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