The United States Supreme Court upheld the conviction of Bassam Salman, who traded profitably on nonpublic information received from a friend, Mounir Kara (who himself had received the information from the friend’s younger brother, Maher Kara) based on a theory of trading on prohibited insider information. At the relevant time, Maher was an investment banker in Citigroup’s healthcare investment banking group, where he was privy to confidential information that he had a duty not to disclose, observed the Supreme Court. Generally, said the Supreme Court, an individual who receives so-called “inside information” – termed a “tippee” – from a person who has a fiduciary duty not to disclose such information – termed a “tipper” – breaches his/her fiduciary duty if the tipper receives a “personal benefit.” (Click here to access the Supreme Court’s decision in Dirks v. SEC.) Because of his alleged trading on insider information and his knowledge of the source and circumstances of such information, Mr. Salman was criminally charged for violating the relevant securities law and regulation of the Securities and Exchange Commission that prohibit trading on inside information; convicted; sentenced to three years imprisonment; and required to make over US $730,000 in restitution. (Click here to access the relevant law, 15 USC § 78j(b) and here to access SEC Regulation 10b-5, 17 CFR §240.10b-5.) Mr. Salman appealed his conviction to a federal court of appeals in California. While Mr. Salman’s appeal was pending, a federal court of appeals in New York reversed the conviction of two portfolio managers who traded on insider information received indirectly through two remote corporate insiders, saying that the distance between the managers and the insiders was too great to demonstrate that the managers knew the insiders initially exchanged their information in breach of a duty. The New York court acknowledged that a factfinder could infer a personal gift to a tipper from the gift of confidential information to a trading relative or friend – based on Supreme Court’s decision in Dirks – but that such inference was impermissible absent 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.” (Click here for a discussion of the NY federal court of appeals decision in the article, “Appeals Court Sets Aside Insider Trading Convictions Saying Traders Distance From Corporate Insiders Too Far” as well as a link to the relevant decision in the December 14, 2014 edition of Bridging the Week.) Notwithstanding the NY federal court’s decision, the California federal court of appeals upheld Mr. Salman’s conviction. In affirming the California court’s decision, the Supreme Court concluded that it was “obvious” that Maher received a personal benefit from providing inside information to his brother as he expected his brother to trade on it. This is because, said the Supreme Court, giving a gift of trading information “is the same thing as trading by the tipper followed by a gift of the proceeds.” (Click here for additional perspective on this Supreme Court decision in the article, "Supreme Court Rules on Insider Trading Involving Family and Friends" in the December 9, 2016 edition of Katten Muchin Rosenman's Corporate & Financial Weekly Digest.)

Legal Weeds: The same provisions of the applicable securities law and SEC rule that serve as the basis for a civil action or criminal prosecution for inside trading of securities is the inspiration for a similar provision under law that prohibits employment of a manipulative or deceptive device or contrivance in connection with futures or swaps trading. (Click here to access Commodity Exchange Act Section 6(c)(1), US Code § 9(1), and here to access CFTC Rule 180.1.) The CFTC has previously brought two actions that sound in the securities law concept of inside trading for an employee impermissibly trading based on futures positions of his employer. (Click here for background on both cases in the article, “Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information” in the October 2, 2016 edition of Bridging the Week.)