Last month, federal prosecutors achieved a resounding victory in a tipping case before the U.S. Supreme Court in Salman v. United States, 580 U. S. ____ (2016). In its much anticipated decision, the Court held that a jury could infer that the tipper personally benefited from making a gift of confidential information to a trading relative, even where the tipper did not receive something of a “pecuniary or similarly valuable nature” in return.
Bassam Y. Salman was indicted for trading on inside information he received from a friend and extended relative, Michael Kara, who, in turn, had received the information from his brother, Maher Kara, a former investment banker at Citigroup (who was also Salman’s brother-in-law). Maher testified at trial that he shared inside information with Michael to benefit him and expected him to trade on it, while Michael testified to sharing that information with Salman, who knew that it had originated with Maher.
Salman argued that he could not be held liable as a tippee because the tipper (Maher) did not personally receive money or property in exchange for the tips and thus did not personally benefit from them.
The Government, meanwhile, argued that a gift of confidential information to anyone, not just a “trading relative or friend,” is enough to prove securities fraud because a tipper personally benefits through any disclosure of confidential trading information for a personal (non-corporate) purpose.
In rejecting Salman’s argument, the Court relied on a 1983 decision by the Burger Court, Dirks v. SEC, 463 U. S. 646 (1983), where the Court explained that tippee liability hinges on whether the tipper’s disclosure breaches fiduciary duty, which occurs when the tipper discloses the information for a personal benefit. The Court held that a personal benefit may be inferred where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.”
The Court explained that “making a gift of inside information to a relative . . . is little different from trading on the information, obtaining the profits and doling them out to the trading relative. The tipper benefits either way.”
In rendering its decision, the Court declined to follow a decision by the Second Circuit in United States v. Newman, 773 F. 3d 438 (2d Cir. 2014), cert. denied, 577 U. S. ___ (2015), which was issued while Salman’s appeal was pending. There, the court had concluded that to infer a personal benefit to the tipper from a gift of confidential information to trading relative or friend “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.” 773 F. 3d, at 452.
What remains unclear is how the personal benefit requirement might apply to circumstances not involving friends or relatives, but what appears to be clear is that the common struggle to establish that an insider was expecting a benefit in exchange for the tip to a friend or relative is now a thing of the past.
The analysis applicable in the United States is in contrast to the tipping prohibitions found in Canadian provincial securities statutes, which do not require that the tipper received a personal benefit from the provision of material non-public information to a tippee. To establish tipping in Canada, it need only be proved that a person in a special relationship to an issuer conveyed material non-public information to a tippee or recommended or encouraged another to trade.