SUPREME COURT UPHOLDS CONVICTION OF INSIDER TRADER WHO RECEIVED TIPS FROM A FAMILY FRIEND, AND REJECTS NEWMAN'S NARROWING INTERPRETATION OF "PERSONAL GAINS"
The Supreme Court, in a unanimous decision issued on December 6, 2016, upheld the Ninth Circuit's earlier insider trading conviction of Bassam Yacoub Salman. (United States v. Salman, 580 U.S. _ (2016)). The case concerns insider trading involving family friends. Salman's sister married a former investment banker, Maher Kara, and Maher shared material non-public information with his own brother, Michael Kara, who, in turn, shared such information with Salman. Salman traded on the information and was convicted after a jury trial for insider trading. As we reported earlier, in his appeal, the Ninth Circuit affirmed the conviction despite Salman's arguments based on the Second Circuit decision United States v. Newman, 773 F.3d 438, cert. denied, 577 U.S._. In the recent Supreme Court decision, the Court affirmed the Ninth Circuit's interpretation of the landmark insider trading case, Dirks v. SEC, 463 U.S. 646, which suggests that the fact a tipper gives "a gift of confidential information to a trading relative" is enough for the jury to infer that the tipper has gained personal benefits required for an insider trading conviction. The case is important in that it resolves the circuit split between Newman and the earlier Salman decision, and clarifies what constitute "personal benefits" in tipper-tippee insider trading cases.
Factual Background and the Ninth Circuit Decision
Salman was convicted of insider trading. He received inside information from Michael Kara, a close friend and relative-by-marriage. Michael Kara in turn received the inside information from his brother, Maher Kara, an investment banker in a prominent firm's healthcare investment banking group, who married Salman's sister. 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 over US$ 1.5 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. In addition, Maher testified that Michael was like "a second father" to him, and was the best man at his wedding. The jury in the original trial was 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. The opinion authored by Senior U.S. District Judge Jed S. Rakoff emphasized that the Supreme 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" in Dirks. Thus, the Ninth Circuit determined that 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. In doing so, the Ninth Circuit declined to follow Newman, to the extent that Newman could be read to hold that the evidence of a familial relationship between the tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a personal benefit.
The Supreme Court's Decision
The Supreme Court affirmed that the Ninth Circuit has properly applied the holding in Dirks. While Salman contends that a mere gift of confidential information to a friend or family member is insufficient without showing that the tipper had a goal to obtain money, property, or something of tangible value, the Court found that the holding of Dirks clearly anticipated that the required personal benefits exist "when an insider makes a gift of confidential information to a trading relative or friend." The Court explained that gifting trading information resembles trading by the tipper followed by a gift of the proceeds. The Court declined to broaden the scope of "personal benefits" by accepting the government's proposal that a gift of confidential information to anyone would qualify.
While the Supreme Court's decision follows a literal reading of Dirks and provides a bright-line rule in relatively simple cases where the tipper and tippee have a close family or friend relationship, it does not overturn Newman completely. As we have previously analyzed, there are significant factual differences between the Newman case and the Salman case. The Court also recognized that 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, while in Salman, by contrast, the three main players were close friends and relatives. While Newman's holding that something of a "pecuniary or similarly valuable nature" must be received by the tipper is rejected when the tipper and the tippee are relatives or friends (because personal benefits are inferred in such circumstances), personal benefits must still be proved for a remote tipper-tippee relationship. In a footnote, the Court also suggested that in a close case like Newman, a showing that the tippee traders knew the information they traded on came from insiders is still necessary.
The Salman decision will likely boost the U.S. government's continued campaign against insider trading, which has faced some setback following the Newman decision. While the incoming administration's law enforcement priorities are still unclear, a key prosecutor focusing on insider trading cases, the Southern District of New York's Preet Bharara, has indicated that he intends to remain in office. Market participants should be mindful of insider trading risks and establish proper compliance policies and procedures in their operations.