This month, the US Supreme Court affirmed the conviction for insider trading of Bassam Salman, who had argued that his insider trading conviction should be reversed because the original tipper received no pecuniary benefit for gifting tips to his brother.
The government convicted Salman of violating § 10(b) of the 1934 Securities and Exchange Act and SEC Rule 10b-5 after he traded based on tips he received from his brother-in-law, Michael Kara. Michael Kara in turn had received the tips from his brother, Maher Kara, an investment banker with access to insider information. Maher Kara testified he gave insider information to his brother Michael with the knowledge Michael would trade based upon the information and to satisfy "whatever needs he [Michael] had." Maher Kara received no pecuniary rewards from Salman for passing on any insider information.
Salman argued that under the Supreme Court case Dirks v. SEC, the government could not prove that Maher, the tipper, had received a pecuniary benefit in exchange for the tips he provided to his brother Michael, which would preclude Salman's conviction for insider trading based on the tips. The government argued that Maher had received a benefit for his insider tips; gifting tips to his brother had the same effect as Maher trading on the tips himself and gifting the profits from the illegal trades to his brother.
The Supreme Court ruled that a tipper breaches a fiduciary duty sufficient to violate § 10(b) and SEC Rule 10b-5 when he gifts insider information to a "trading relative." According to the Court, gifting insider information has the same effect as trading on the insider information and gifting the profits to the tippee. While disclosing insider information for no benefit at all is insufficient grounds for an insider trading conviction, a relationship between the tipper and tip recipient can provide evidence of a personal benefit to the tipper sufficient to sustain a conviction for insider trading.