Family Ties: Salman and the Scope of Insider Trading

Abstract

On October 5, 2016, the Supreme Court heard oral argument in Salman v. United States. Salman raises questions about the scope of insider trading liability for tippees under the personal benefit test previously articulated in Dirks v. SEC. Some critics have argued the Second Circuit’s decision last year in United States v. Newman demonstrates that the personal benefit test is unduly restrictive and should be reconsidered. Salman offers an opportunity for the Supreme Court to do so.

This essay argues that Salman does not require the Court to reexamine the parameters of insider trading liability. Instead, the Court can affirm Salman on the basis of a simple principle: family is different. Specifically, the essay explains the reasons that tips to close family members provide a personal benefit to the tipper consistent with the Dirks test. As Justice Breyer observed at oral argument in Salman, “to help a close family member is like helping yourself.”

Dirks was motivated by an effort to provide sufficient predictability to enable market participants to search out information without undue fear of liability. The test has proved workable in practice – imposing liability in cases of insider self-dealing while constraining overreaching by government prosecutors. It is unnecessary to revisit this balance to affirm Salman’s conviction.

Keywords: Securities Law, Insider Trading, Criminal Law, Personal Benefit Test, Gift of Confidential Information to a Relative, Family or Familial Relationship, Tippee, Salman, Dirks, Breach of Fiduciary Duty

JEL Classification: K14, K22