In recent years, both the Securities and Exchange Commission and the Department of Justice have become highly aggressive in their efforts to combat insider trading, leading to many high-profile victories as well as a few losses. Increasingly, so-called “remote” tippees who are several levels removed from the corporate insider, or tipper, have become targets of these enforcement actions. The standards for deciding when a remote tippee is permitted to trade in nonpublic market information, however, are still unsettled. A few weeks ago, the U.S. Supreme Court agreed to review the Ninth Circuit’s decision in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015), on the question of what type of “personal benefit” to the corporate insider is necessary to establish a claim for insider trading. Salman v. United States, – S. Ct. –, 2016 WL 207256, at *1 (2016) (No. 15-628). In all likelihood, the Supreme Court’s decision will have a profound impact on future prosecutions of insider-trading cases.
Liability Under ‘Dirks v. SEC’
In the seminal Supreme Court case of Dirks v. SEC, 463 U.S. 646 (1983), the court laid out the contours of tipping liability for insider trading under the antifraud provisions of the federal securities laws. The court began by reaffirming its prior decisions that the duty to refrain from trading on material nonpublic information arises from the existence of a fiduciary relationship between the corporate insider and the company, not from the mere possession of such information. To hold otherwise, the court explained, would “amount to recognizing a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.” Id. at 655 (internal quotations omitted).
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