Insider Trading Law After Salman v. United
States
By Jon Eisenberg
In Salman v. United States,1 decided on December 6, 2016, the Supreme Court
upheld a conviction for criminal violations of insider trading laws. The Court,
however, declined to adopt the expansive theories of insider trading advanced by the
government and expressed skepticism about those theories at oral argument.
Salman provides an appropriate occasion to describe what Judge Rakoff referred to
as the “topsy-turvy” way in which insider trading law has developed. 2 We trace the
evolution of the law up to and including Salman and discuss five potential defenses
that exist even after the Supreme Court’s decision.
As discussed below, the Supreme Court long ago rejected the government’s equal-
access theory of insider trading, and instead required a breach of a duty of trust and
confidence to support insider trading liability. The breach must involve a personal
benefit to the insider or “misappropriator.” When insiders or misappropriators trade
on material nonpublic information, the Supreme Court’s breach-of-duty requirement
will rarely pose an obstacle to liability. In addition, the government’s burden may not
be particularly difficult in the case of a tip in exchange for a financial benefit to the
tipper or a tip to a close friend or relative who trades.
As soon as other tippees enter the picture, however, the burden becomes much
more difficult for the government. The Second Circuit’s decision in United States v.
Newman,3 in both tone and its articulation of the governing principles, reflected
exasperation with the government’s pursuit of remote tippees on paper-thin grounds.
Newman’s (i) requirement that the government prove that the tippee knew (or, in a
civil case, at least should have known) that the source tipped the information for the
source’s personal benefit, (ii) its limitation on who counts as a “friend” for insider
trading purposes, and (iii) its requirement of “an exchange that is objective,
consequential, and represents at least a potential gain of a pecuniary or similarly
valuable nature” in the case of tips to persons other than close friends and relatives
survive Salman, as does the Second Circuit’s expressed concern about the “doctrinal
novelty” of the government’s prosecutions of remote tippees. As a result, even after
the government’s win in Salman, the government will often have great difficulty
prosecuting tippees who are many levels removed from the source of the
information.
1 Slip op. No. 15-628 (S.Ct. Dec. 6, 2016).
2 United States v. Whitman, 904 F. Supp. 2d 363, 371 (S.D.N.Y. 2012).
3 773 F.3d 438 (2014), cert. denied, 136 S.Ct. 242 (2015).
5 January 2017
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Insider Trading Law After
Salman V. United States
2
I. Introduction
Insider trading law is one of many examples of Congress providing no meaningful
guidance and the courts largely inventing the law. In 1934, Congress enacted the
Securities Exchange Act, the first major federal securities statute to regulate
secondary market trading. Section 9 of the Securities Exchange Act defined with
specificity a number of prohibited forms of manipulation and deception (principally
wash sales, matched orders, engaging in a series of transactions with the specific
intent of raising or depressing the price of a security, inducing the purchase of
securities through misrepresentations or omissions, and spreading false rumors).
Section 10(b) then authorized the Securities and Exchange Commission (“SEC” or
“the Commission”) to prohibit or regulate any other “manipulative or deceptive device
or contrivance.” Neither section addressed insider trading as such, and nothing in
the language or legislative history of Section 10(b) suggests that Congress had
insider trading in mind when it adopted Section 10(b). Divining the elements of an
insider trading violation from the language or legislative history of Section 10(b), or
indeed the legislative history of the entire Securities Exchange Act, is quite the
impossible task.
II. In re Cady, Roberts & Co. (1961) — The SEC Finds in Section 10(b) a
Broad Prohibition Against Trading on Material Nonpublic Information
In 1959, Robert Gintel, a partner at Cady, Roberts & Co., a broker-dealer, learned
from a director of Curtiss-Wright Corporation that the company was cutting its
dividend. The director who provided the information to Gintel also happened to be
employed by Cady, Roberts. Upon receiving the information and before the
information was made public, Gintel caused 21 accounts to sell their Curtiss-Wright
shares. The Commission learned of the conduct and was appalled, but figuring out
why Gintel was prohibited from trading was a challenge. After all, Gintel was not
himself an insider, and he had no relationship to the persons who purchased the
Curtiss-Wright Corporation shares that his clients sold.
Writing for the Commission in its 1961 Cady Roberts decision, SEC Chairman
William Cary described it as a “case of first impression and one of signal importance
in our administration of the Federal securities acts.”4 In the nearly three decades of
its existence up to that time, the Commission had not had a prior occasion to
consider whether a broker (or other person), after receiving nonpublic information
from a director of a public company, was prohibited from trading on the basis of that
information.
With nothing better in hand to address the conduct, the Commission found in Section
10(b) a nearly limitless grant of authority to prohibit any securities-related conduct it
thought unfair. Chairman Cary found in Section 10(b) a prohibition against “the
infinite variety of devices by which undue advantage may be taken of investors and
others.”5 He waxed poetic about the breadth of conduct embraced by the prohibition
4 In re Cady, Roberts & Co., 40 S.E.C. 907 (1961).
5 Id. at 911.
