Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Karp, Dan Kramer, Lorin Reisner, Rich Tarlowe, Audra Soloway, and Andrew Ehrlich.
The Supreme Court yesterday [Dec. 6, 2016] issued its first opinion addressing the scope of insider trading liability in nearly twenty years. In a much anticipated decision, the Court in Salman v. United States addressed whether insider trading liability can arise where a tipper makes a “gift” of confidential information to a trading friend or relative but receives no financial or other tangible benefit in return. Relying on the 1983 seminal insider trading case, Dirks v. SEC, the Supreme Court answered that question in the affirmative.
In Dirks, the Court articulated the so-called personal benefit test. In particular, the Court held that trading on inside information is unlawful only if there has been a breach of a duty of trust and confidence, and that the test for determining whether such a breach has occurred is whether the insider personally benefits from the disclosure. The precise contours of the personal benefit requirement have been subject to debate and uncertainty following the Second Circuit’s landmark decision in 2014 in United States v. Newman.