In 1857 a United States newspaper announced Mark Twain’s death and printed his obituary. When Twain learned of his passing, legend has it he quipped “Reports of my death have been greatly exaggerated.” Twain’s supposed quote applies with equal force to the reports floating around the legal community that United States v. Newman met an untimely demise this week. In both cases, contrary to what some people thought, Twain and Newman at the time of their reported deaths remained very much alive.
Last week the Supreme Court handed down a unanimous opinion in United States v. Salman. It was a highly anticipated opinion by those of us who follow the evolution of insider trading law … and yes I recognize that following insider trading law is, at the least, a little bit geeky. Nevertheless, many observers eagerly awaited the Supreme Court’s ruling. As it turned out, the ruling was kind of a dud.
Salman unsurprisingly reaffirmed Dirks v SEC (PDF: 16.3 MB) noting “This Court adheres to the holding in Dirks, which easily resolves the case at hand: ‘when an insider makes a gift of confidential information to a trading relative or friend . . . [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient,’ 463 U. S. at 664.” The High Court went on to note that the tipper and tippee were not only brothers, but “enjoyed a close relationship.” The tipper “loved his brother very much;” the tippee was like a “second father” to the tipper; the tippee also served as best man at the tipper’s wedding. The Court held that the inference of personal benefit was proper in this case. Salman, the opinion states, falls squarely within Dirks.
Seems simple enough, so why all the hub-bub that the Supreme Court rejected Newman? It is curious because that is not at all what happened. First and foremost, footnote one in the Salman opinion dispels any notion that the Supremes rejected Newman. It says: “The Second Circuit also reversed the Newman defendants’ convictions because the Government introduced no evidence that the defendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips. 773 F. 3d, at 453–454. This case does not implicate those issues.” In Newman, knowledge of the personal benefit (as opposed to the nature of the personal benefit itself) was the main appellate issue. That ruling has been undisturbed, and indeed, went unchallenged by the Southern District of New York and Solicitor General’s office when they collectively sought, but did not receive, a grant of certiorari.
If footnote one is true, and it must be so because I am pretty sure Justice Alito would not lie to us in the opinion, how could anyone claim Newman is no longer the law? I think it is because most people have focused exclusively on the personal benefit test articulated in Newman. The Ninth Circuit declined to follow Newman if Newman held that “pecuniary or similarly valuable nature” is required for personal benefit. The Supreme Court stated that “to the extent … the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends,” such language is inconsistent with Dirks. My reading of this is that neither the Ninth Circuit nor the Supreme Court believes that money or property is the test in a gift giving scenario. For what it is worth, I do not believe that it what the Second Circuit meant either.
Notably, the High Court appears to have left in tact Newman’s language that: “[t]o the extent” Dirks permits “such an inference [of a personal benefit],” the inference “is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain . . . . ” So, while commentators have focused on the pecuniary language of Newman, I think we have collectively missed the boat. The truly important language in that section of Newman is the requirement for closeness. The Second Circuit stated that a personal benefit inference was unavailable in the absence of “a meaningfully close personal relationship.” That appears to the be the key phrase. Therefore, Newman seems to be on the same page with Salman (PDF: 101 KB), and ergo Dirks, because of the focus on the indica of a close relationship. In essence each case means that casual relationships do not allow for an inference of personal benefit – but close ones do.
Where does this appear in Salman? It is in the factual analysis the Court conducted. The Salman opinion discusses the closeness of the brothers. The Court explained that the relationship was “very close”; it used terms like “a second father” and “best man at [his brother’s] wedding.” This factual analysis suggests that the mere fact of shared DNA alone does not permit the personal benefit inference; if it did, the Court would not have needed to discuss the closeness of the tipper and tippee. The truth is that labels such as family and friends are not the definitive part of the personal benefit analysis. They are the starting point; closeness is the true test.
Frankly, this makes a lot of sense. Think about how many people you refer to as “friend.” Surely, they are not all the same. There are best friends, close friends, Facebook friends, work friends, casual friends and even frenemies. The fact that I call someone “friend” does not indicate how close I am to this person, and whether I would intentionally violate the law for them. Family falls into the same category. Certainly, estranged family members are not as likely to gift confidential information as would close family members. Thus, the word itself family or friend is not the touchstone, it is the relationship itself that matters.
So, is the rumor of Newman’s death greatly exaggerated? It seems so. Salman and Newman can exist in the same world because they are very different cases. Indeed, they appear to represent opposite ends of the gifting spectrum. Salman means that if the tipper and the tippee have a familial relationship and the government proves it is a close one, a jury may find an inference of personal benefit in the gift of confidential information. However, Newman means that where there is no actual closeness (for example allegations that the tipper and tippee went to college together years ago and had occasional meals together) it is not sufficient to permit an inference of personal benefit. The question that everyone seems to want an answer to is: what is the line that separates sufficiently close from too casual? Unfortunately, Salman does not even try to answer that question.
Gregory Morvillo is a partner in the New York office of Morvillo LLP. He specializes in insider trading and securities fraud cases.
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