The US Supreme Court has accepted an appeal from a Ninth Circuit decision on insider trading. Whatever the Justices do with this case, they will surely shed some light on the future of this sometimes very confusing body of law.
Specifically: on January 19, the high court granted cert on Salman v. United States. This case arose because a Citigroup investment banker had a big mouth. The banker told his brother about a pending acquisition, and the brother in turn blabbed about this to the defendant, Bassam Yacoub Salman.
The banker (Maher Kara) doesn’t seem to have received much of a benefit – certainly no such suitcase of cash as the bad guys receive in Wall Street themed movies. He testified that his brother had become a pest, and stopped being such a pest once he, Maher, had told him, Michael Kara, about a pending acquisition. The brothers both cut deals with the government and testified against Salman.
Salman, convicted in the trial court in April 2014, sentenced to three years in prison, appealed. He argued to the Ninth Circuit that an insider tip to a non-insider can be the predicate of an insider trading charge against the non-insider (or even the next non-insider link on the chain of tipper-tippees) if and only if the original tipper received a personal benefit from making the disclosure.
Newman and Salman
Further, Salman argued that the personal benefit must be (in the words of a Second Circuit in another case of 2014 vintage, United States v. Newman) “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”
In the Newman case, the decision in favor of that defendant did not turn entirely on this definition of a “personal benefit.” It turned rather, on whether the “remote tippee” was aware of the personal benefit (however defined) that the original tipper had received in exchange for that initial leak.
In the Salman case, on the other hand, the question is more precisely focused on what counts as a personal benefit. If Maher Kara received a personal benefit in the relevant sense simply because he wanted to get his persistently inquisitive brother “off his back,” then Salman loses. But if he didn’t receive a personal benefit then, if something more objective and pecuniary is required for the benefit to the tipper to count, and thus for the leak to serve to predicate an insider trading charge for any subsequently magnetized links on the chain, then (whatever Salman knew or didn’t know), Salman wins.
The Ninth Circuit said that Salman loses. That is the point the Supreme Court has now agreed to consider.
Another Issue Dropped By the Wayside
There was also some back-and-forth in the courts below about a “willful blindness” jury instruction. As a matter of accepted law, if a trader remains unaware of the insider nature of the information on which he trades only because he has made himself ‘willfully blind’ to the sourcing, his ignorance will not serve as a defense. In this case the defense argued that the trial judge should not have instructed the jury on a “willful blindness” principle, because such blindness only exists once a trader has taken “active steps” to remain ignorant, and there was no such evidence here.
The Ninth Circuit disagreed, writing that the trial judge’s “willful blindness” charge was unobjectionable. It reasoned that “at least under circumstances where a reasonable person would make further inquiries” failure to make such inquiries can be willful enough, without additional “active steps.”
But the whole “willful blindness” issue seems to have been dropped by the wayside. The Supreme Court granted cert only on the issue of the nature of a personal benefit to the original tipper discussed above.
A Thought on Compliance
One point that has to be made in all this: the outcome of the case should have no significance at all for the compliance programs of hedge fund firms and other financial institutions. The Supreme Court’s decision will matter to the fringes of what prosecutions will succeed, and by implication it will probably matter on the fringes of what prosecutions will be brought. But that shouldn’t cause compliance officers to lessen their own vigilance or change their parameters.