The Ninth Circuit, in a decision issued on July 6, 2015, has upheld the insider trading conviction of Bassam Yacoub Salman for insider trading securities fraud. (United States v. Salman, 2015 WL 4068903 (9th Cir. 2015)). Salman traded based upon material non-public information he received from a friend who had in turn received the information from his investment banker brother. Salman's conviction was upheld despite Salman's contention that the Second Circuit decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), required the insider tipper to receive a greater level of personal benefit than was present in the Salman's case.
Salman was accused of receiving material non-public information (inside information) from Michael Kara, a close friend. Michael Kara in turn received the inside information from his brother (and Salman's future brother-in-law) Maher Kara, an investment banker in a prominent firm's healthcare investment banking group. The inside information related to transactions involving the clients of Maher's investment bank. Maher had a close relationship with his brother Michael and testified that he provided the information to Michael in order to benefit him. Michael began to share the inside information with Salman and encouraged Salman to mirror his trading activity, which resulted in Salman gaining about $1.7 million in profit from the trades.
Salman knew that Maher was the source of the information and was further aware of the close relationship between Maher and Michael, particularly given Maher's marriage to Salman's sister and the close relationship between the two families. In addition, there was evidence that Michael helped pay for Maher's college, had stood in for their deceased father at Maher's wedding, and had coached Maher in basic science to help him succeed at his job. The jury in the original trial was also directed to find that Salman also knew that Maher gained a personal benefit from the disclosure of the information to Michael.
Salman was convicted after a jury trial and appealed to the Ninth Circuit. The Ninth Circuit affirmed the conviction.
Ninth Circuit decision
Salman contended that the Second Circuit, in Newman, made the personal benefit element of an insider trading violation more restrictive, and that his conviction should be overturned because the evidence did not satisfy that element. In particular, he contended that Michael's (the tippee) fraternal relationship with Maher (the tipper) was not enough to establish that Maher had received a benefit under the Newman standard which required "proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”
The Ninth Circuit, in an opinion authored by Senior U.S. District Judge Jed S. Rakoff, disagreed, determining that the Supreme Court's decision in Dirks v. SEC governed Salman's tippee liability. There, the Court had defined personal benefit as "not only pecuniary gain, but also, inter alia, . . . the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend."
The Ninth Circuit determined that, in the instant case, Maher's disclosure to Michael constituted a gift of confidential information to a trading relative, that Maher received a benefit in return for this gift, and that Salman knew of Maher's involvement and the personal benefit received by Maher.
Judge Rakoff, who is a judge in one of the courts overseen by the Second Circuit, was sitting in the Ninth Circuit. It is common for U.S. judges in one court to sit in other cthe benefit one would obtain from simply making a gift of confidential information to a trading relative or friendourts, a process which allows judges from one part of the country to help relieve the workload of their judicial colleagues elsewhere. Judge Rakoff often sits in the Ninth Circuit, and has authored several noteworthy Ninth Circuit decisions involving mail fraud (e.g. United States v. Phillips, 704 F.3d 754 (9th Cir. 2012)), bank fraud (e.g. United States v. Salado, 590 F. App'x 692 (9th Cir. 2003)), and other white-collar fraud issues (e.g. U.S. v. Quassani, 593 Fed.Appx. 627 (9th Cir. 2015)).
Contrast with Newman
Although Newman was not binding upon the Ninth Circuit, the court considered the defendant's argument that Newman interpretedDirks to require more evidence of a personal benefit than was present, because, as Judge Rakoff observed, the Court "would not lightly ignore the most recent ruling of our sister circuit [the Second Circuit] in an area of law that it has frequently encountered." Nevertheless, the Ninth Circuit declined to follow Newman, to the extent that Newman could be read to hold that evidence of a familial relationship between the tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit.
The Ninth Circuit took this position, first on the basis of the language from Dirks quoted above, and also based on Newman itself, which quoted the same holding that a personal benefit includes "the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend."
The court observed that if the defendant's reading of Newman were accepted, a corporate insider or other person in possession of material non-public information would be free to disclose that information to her relatives, and they would be free to trade on it, provided she did not ask for tangible compensation in return. Thus, the court concluded that "[p]roof that the insider disclosed material non-public information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary element of insider trading."
Other Rakoff Insider Trading Decisions
It is interesting that Judge Rakoff found himself in the position to author the Salman decision for the Ninth Circuit. Some might call it a fortunate accident given that such cases are allotted randomly. Judge Rakoff, who is well-known for his expertise in securities fraud cases, has criticized the Second Circuit's insider trading decisions in the past. Indeed, in one case, Judge Rakoff observed that the Second Circuit's decisions in the area have been "somewhat Delphic." (United States v. Whitman, 904 F.Supp. 2d 363, 371 n.6 (S.D.N.Y. 2012)).
More recently, Judge Rakoff has raised questions about the reasoning of Newman in his own district court cases. For example, in SEC v. Payton, Judge Rakoff stated that "it may not be easy for a lower court, which is bound to follow [Dirks and Newman] to reconcile the two." (SEC v. Payton, 14 CIV. 4644 (S.D.N.Y. 2015) In that case, Judge Rakoff permitted the SEC to pursue civil charges against brokers for insider trading, even where the criminal case was precluded by Newman.
Judge Rakoff also recently distinguished Newman in rejecting Rajat Gupta's attempt to set aside his insider trading conviction based upon Newman, on the basis that, unlike the Newman scenario, where the defendants were remote tippees, in Gupta's case he was the tipper who disclosed inside information in breach of a duty. Judge Rakoff reiterated that "a tipper is liable for securities fraud if he takes sensitive market information provided to him in a fiduciary capacity and exploits it for some personal benefit . . . Newman in no way purports to change this fundamental concept." (Salman)).
Circuit split and cert?
There are significant factual differences between the Newman case and the Salman case. In Newman, the defendants were hedge fund traders who were far removed from the source of the information and had almost no contact with the source. Moreover, the evidence that the company officials who provided the information had benefited was scant. In Salman, by contrast, the three main players, the source (Maher), the middle-man (Michael), and the trader (Salman), were close friends and relatives. There also was substantial evidence that Michael had provided Maher with substantial benefits. These factual differences make it understandable why Salman's conviction was upheld, while the convictions in Newman were vacated.
However, Judge Rakoff's suggestion that Newman is inconsistent with the language in the Supreme Court's decision in Dirks and the declaration that the Ninth Circuit will not follow Newman to the extent that it requires a pecuniary element to establish personal benefit, raises the specter of a circuit split on the critical issue of the personal benefit requirement for insider trading liability. The United States Solicitor General currently has until August 1, 2015 to decide whether to seek certiorari to the Supreme Court in the Newman case. A circuit split makes such a request more likely, and it makes it more likely that the Supreme Court will grant such certiorari petition and hear the case.
Additionally, since the Ninth Circuit ruled against Salman, he can file his own petition for certiorari on the issue. This means that, even if the Solicitor General declines to appeal Newman, the case could wind up in the Supreme Court.
The Salman decision demonstrates that the U.S. government's campaign against insider trading is still alive, and that those who view Newman as a "get out of jail free" card for insider trading are mistaken. Although the law continues to be unsettled in this area, market participants should understand that the government will continue its enforcement efforts.