Emily Westridge Black and Carrington Giammittorio 2017-12-20 04:50:01
The U.S. Supreme Court took up its first insider trading case in more than 20 years and issued an important opinion addressing the applicability of equitable tolling to the Securities Act of 1933’s statute of response. Insider Trading Developments More than 30 years ago, the Supreme Court held in Dirks v. SEC1 that a tippee may be liable for insider trading if the tipper breached a fiduciary duty in disclosing the information, which occurs when the tipper receives a personal benefit from the disclosure. In recent years, the circuit courts had split over what constitutes a “personal benefit.” In United States v. Newman,2 the 2nd Circuit Court of Appeals held that a personal benefit could not be inferred unless the tipper and the tippee have a “meaningfully close personal relationship” and engage in an exchange that results in “at least a potential gain of a pecuniary or similarly valuable nature” for the tipper. But in United States v. Salman,3 the 9th Circuit declined to follow Newman, and held that a tipper receives a personal benefit when he makes “a gift of confidential information to a trading relative.” The Supreme Court addressed the split in Salman v. United States,4 affirming the 9th Circuit’s interpretation of Dirks and noting that, when a tipper gives inside information to a trading relative, a fact-finder can infer that “the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” In doing so, the court expressly rejected Newman’s pecuniary benefit requirement but did not address whether the tipper and tippee must have a close relationship. Thereafter, the 2nd Circuit scuttled the close relationship requirement in United States v. Martoma.5 The three-judge panel reasoned that, under Salman, “gifting” confidential information with the expectation that the tippee will trade on it is the functional equivalent of a cash gift. Thus, there is no basis for distinguishing between “gifts” of confidential information to people with whom a tipper has a “meaningfully close personal relationship” and gifts to those with whom the tipper does not have such a relationship. Moving forward, the relevant inquiry is simply whether a tipper discloses the confidential information with an expectation that the tippee will trade on it. No Equitable Tolling of Securities Act’s Statute of Repose In June, the Supreme Court held in California Public Employees’ Retirement System v. ANZ Securities, Inc.6 that the three-year time limit in the Securities Act of 1933 is a statute of repose and, thus, not subject to equitable tolling. The underlying dispute began in 2008, when plaintiffs filed a putative class action relating to debt securities issued by Lehman Brothers Holdings Inc. between July 2007 and January 2008. The California Public Employees’ Retirement System, or CalPERS, was part of the putative class but was not a named plaintiff. In February 2011, more than three years after the offering at issue, CalPERS opted out of the class and filed a separate complaint. The district court dismissed CalPERS’ complaint as untimely, and the 2nd Circuit affirmed. Justice Anthony Kennedy delivered the opinion of a 5-4 court, holding that the equitable tolling doctrine of American Pipe & Construction Co. v. Utah,7 which provides that commencement of a putative class action tolls the applicable limitations period as to all asserted class members until the action is resolved or the class is denied or decertified, could not supersede the express language in the Securities Act’s statute of repose. In doing so, the court rejected CalPERS’ argument that individual claims should be deemed to have been filed with the putative class claims. Going forward, the CalPERS opinion will provide security to defendants regarding the scope of their potential liability in class actions involving claims that are subject to statutes of repose. Notes 1) 463 U.S. 646 (1983). 2) 773 F.3d 438 (2014), cert. denied, 136 S.Ct. 242 (2015). 3) 792 F.3d 1087 (9th Cir. 2015). 4) 137 S.Ct. 420 (2016). 5) 869 F.3d 58 (2nd Cir. 2017). 6) 137 S.Ct. 2042 (2017). 7) 414 U.S. 538 (1974). EMILY WESTRIDGE BLACK is a partner in the Austin office of Haynes and Boone and specializes in complex commercial litigation, antitrust, and white-collar defense. CARRINGTON GIAMMITTORIO is an associate of the firm’s Dallas office and specializes in complex commercial litigation, antitrust, and white-collar defense.
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