- The U.S. Supreme Court's unanimous Dec. 6, 2016, decision in Salman v. United States removes an obstacle to prosecuting insider trading cases involving a tip of material nonpublic information (MNPI) to a friend or relative.
- Other requirements remain in place, including knowing that the MNPI was obtained in breach of the tipper's duty.
- As a result of the Salman decision, the number of both civil and criminal insider trading cases is likely to increase.
The U.S. Supreme Court has clarified what constitutes illegal insider trading by making it easier for the government to bring such cases. In a Dec. 6, 2016, unanimous decision in Salman v. United States,1 the court held that when an insider tips material nonpublic information (MNPI) to a relative or friend, there can be insider trading liability even if the tipper did not receive a concrete benefit for tipping the trader. In these circumstances, both the tipper and the tippee-trader can be held liable for the tippee's trading. Salman is significant because many insider trading cases involve tips between friends or family members.
In its seminal decision in Dirks v. SEC,2 the Supreme Court held that in the tipper-tippee scenario, there is no liability unless the tipper disclosed the MNPI to the tippee in exchange for a personal benefit. In 2014, in United States v. Newman,3 the U.S. Court of Appeals for the Second Circuit strictly construed the personal benefit requirement, holding that for liability to attach to a trader, the insider who disclosed the information had to have received a personal benefit of "a pecuniary or similarly valuable nature."4 That decision hindered the government's efforts to criminally and civilly prosecute insider trading cases involving tips. In its decision in Salman, however,the U.S. Court of Appeals for the Ninth Circuit declined to follow Newman, leading to a circuit split.
The Salman case involved investment banker Maher Kara, an insider who passed along to his brother, Michael Kara, tips about pending corporate mergers and acquisitions. Michael, in turn, shared the information with his friend Bassam Salman (who was also Maher’s brother-in-law), who then traded on it, profiting by more than $1.5 million. A federal jury in San Francisco convicted Salman of conspiracy and securities fraud, and he was sentenced to three years in prison.
In its first major insider trading case in nearly 20 years, the Supreme Court has now held that where the tipper and tippee are friends or relatives, there can be insider trading liability even if the tipper did not receive a gain of a pecuniary or similarly valuable nature.
The decision represents a significant departure from the Second Circuit's holding that mere friendship or family connections are not enough to satisfy the Dirks requirement that the tipper must have received a "personal benefit" before liability can attach. The court noted that providing MNPI to a friend or relative who then trades on it is no different than trading on such information, profiting and then sharing the proceeds with that friend or relative. The Salman decision, however, leaves untouched the requirement, upheld in Newman, that the tippee know the information was obtained as a result of a breach of the tipper's duty. In many instances, that requirement will still limit the government's ability to prove liability or guilt. Similarly, Salman does not affect instances where MNPI is disclosed without any expectation that the recipient will trade on it.
While Salman makes it easier for the government to prosecute insider trading cases both criminally and civilly, it still leaves open the question of how close the tipper-tippee relationship must be. It is unclear, for example, whether an acquaintance or distant cousin is enough.
Salman is likely to lead to a resurgence of insider trading cases brought by both the U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC), particularly in New York and the other parts of the Northeast that are located within the Second Circuit. The decision's impact will also be felt elsewhere, with prosecutors and SEC staff no longer concerned about the persuasive effect of Newman's narrower reading of insider trading liability. Expect that the decision will breathe new life into the government's criminal and civil insider trading enforcement efforts.
3 773 F.3d 438 (2d. Cir. 2014)
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.