In a closely watched decision by the Supreme Court issued today, the Court unanimously sided with the Ninth Circuit over the Second Circuit when it determined that, to prove securities fraud against a “tippee” who receives an insider tip, the government is not required to show that the “tipper” received anything tangible in return. https://www.supremecourt.gov/opinions/16pdf/15-628_m6ho.pdf
The decision slams the door shut on the Second Circuit’s approach, announced in 2014 in the case United States v. Newman. In Newman, the Second Circuit broke with other Circuits – and, it turns out, Supreme Court precedent – when it determined that, when prosecuting a tippee, the government must demonstrate that an insider who gives a tip to a friend or relative must receive something valuable in return. The Supreme Court had previously decided that a tipper must receive a personal gain, and had suggested that personal gain could simply be to help the tipper’s friend or relative. The Newman court ignored the Supreme Court’s suggestion and said that the tipper must receive at least a potential gain in money or something else valuable, in exchange for the tip. The Second Circuit’s decision was the first to give “teeth” to the personal-benefit element.
Soon after Newman, the Ninth Circuit hewed to the literal reading of Supreme Court precedent later in United States v. Salman, and the Supreme Court agreed with this approach today. As the Supreme Court explained, it would be illegal for an insider to trade on inside knowledge and then give the trading proceeds to a friend or relative as a gift. Therefore, according to the Supreme Court, it is illegal for an insider to tip off a friend or relative with the expectation that the friend or relative will then trade on the tip and pocket the gain directly. Characterizing this simple test as a “commonsense point,” the Court defanged the personal-benefit element and noted that the jury instructions retain safeguards to ensure the government does not overreach with its securities-fraud prosecutions.
As the former Securities Fraud Coordinator for the U.S. Attorney’s Office, I was particularly interested in how short the opinion was, and how little regard the Justices appeared to have for the Second Circuit’s Newman decision. However, the Supreme Court’ did not address Newman’s second controversial holding – that the government must demonstrate that the tippee on trial knew about the tipper’s personal benefit. This knowledge can be very difficult for the government to prove with “remote” tippees, who may be many steps removed from the initial tip. The Department of Justice is no doubt looking for such remote-tippee cases in other circuits to attack this “knowledge of the personal benefit” holding in Newman by creating a circuit split that only the Supreme Court can resolve. Stay tuned.
EVAN DAVIS – For more information please contact Evan Davis – email@example.com or 310.281.3200. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the Criminal Division.
Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).