The Supreme Court has unanimously affirmed the Ninth Circuit’s decision to uphold the conviction of a tippee for insider trading based on tips he received from his brother-in-law, even though the tipper did not receive a financial benefit for passing the tips, because the tips were passed to the tipper’s relatives. In Salman v. United States, the tipper was an investment banker in Citigroup’s healthcare investment banking section. The tipper had a close relationship with his older brother, and the tipper shared inside information about pending mergers and acquisitions with him. Without the tipper’s knowledge, the older brother then shared the inside information with the tipper’s brother-in-law, who became the tippee. The tippee knew the inside information was coming from his brother-in-law, fed through the older brother. Based on the inside information, the tippee made over $1.5 million in profits that he split with another relative. The tippee was indicted on four counts of securities fraud and one count of conspiracy to commit securities fraud. A jury convicted the tippee, and he appealed to the Ninth Circuit, which affirmed the conviction. The tippee then appealed to the Supreme Court, and pointing to a 2014 decision from the Second Circuit, United States v. Newman, the tippee argued that his conviction could not stand because the tipper did not receive a financial benefit for the tips.
Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 prohibit individuals who are under a duty of trust and confidence from tipping inside information to others for trading. The recipient of the information then may commit securities fraud by trading on the inside information if the recipient knows the information was shared in breach of the tipper’s duty of trust and confidence. The tippee is exposed to liability when he participates in the tipper’s breach of a fiduciary duty, which occurs when the tipper discloses the inside information for a personal benefit. In Dirks v. SEC, the Supreme Court explained that a jury can infer a personal benefit when the tipper receives something in value for the tip or when the tipper “makes a gift of confidential information to a trading friend or relative.” 463 U.S. 646, 664 (1983).
In Salman, the Supreme Court relied on this language from Dirks to conclude that the tipper made a gift of confidential information to a relative (his older brother) and that the tippee knew the tipper made such a gift of inside information. Accordingly, the jury could infer that the tipper received a personal benefit, and thus the tippee shared in the breach of the tipper’s fiduciary duty, exposing him to liability. In the Court’s view, making a gift of inside information to a relative is no different than the tipper trading on the inside information himself and then giving the profits to the tippee. In either case, the tipper receives a reputational benefit or perhaps a quid pro quo from the tippee.
The Supreme Court’s holding is mostly a straightforward application of its language from Dirks, but in passing the Court explained that to the extent the Second Circuit’s decision in Newman required that the tipper also receive something of a “pecuniary or similarly valuable nature’ in return for the gift of information to friends or family, that it was inconsistent with its holding in Dirks. 773 F.3d 438, 452 (2d Cir. 2014). In Newman, the tippees were “several steps removed” from the tippers, and there was no evidence that they knew the information they traded on was inside information or that the tippers received a personal benefit in exchange for the information so as to distinguish the Newman case from the situation in Salman. The Salman court chose not to elaborate beyond on the straightforward facts of this case or provide any guidance on who would qualify as a friend or relative under the Dirks test, leaving the issue open to be litigated in future lawsuits.