This past week, the United States Supreme Court heard oral argument in Salman v. United States, an important case concerning federal securities law. At issue are the limitations placed on insiders who trade in the shares of companies on the basis of material, nonpublic information. The parties covered are not only those who obtain the information themselves, but the persons to whom they (as “tippers”) pass on that information, commonly called tippees.

The prohibition on insider trading is said to derive from Section 10(b) of the Securities Exchange Act of 1934, which makes it unlawful for any person to “employ any device, scheme, or artifice, to defraud,” as implemented under SEC Rule 10b-5.  The purpose of this prohibition on insider trading is to restore overall investor confidence in the exchange markets, by denying to certain insiders the ability to reap undue benefit because of the informational advantage from undisclosed information that they gain against their actual or potential trading partners.

The extension of Rule 10b-5 to insider trading only took place in 1962 in the critical SEC decision In Re Cady, Roberts, & Co., and it has been long surrounded by controversy. Salman concerns whether, under Rule 10b-5, the tipper of the inside information had to receive some tangible benefit from the tippee, or whether some more diffuse social benefit sufficed to trigger criminal liability.