On Dec. 6, 2016, in Salman v. United States, the U.S. Supreme Court unanimously held that an insider’s “gift” of confidential information to a “trading relative or friend” was sufficient to show personal benefit to the tipper necessary to establish a breach of fiduciary duty and insider trading liability, resolving a conflict between the Second and Ninth Circuit Courts of Appeals.
The narrow issue before the Court was whether traders who receive a “gift” of confidential information from a relative or friend who is a company insider can be held criminally liable where the tipper of the information did not receive a tangible, financial benefit in return for the tip. In Salman, an insider provided confidential, non-public information to his brother, expecting that his brother would trade on the information. The brother in turn shared the information with the defendant, Bassam Salman, who was his friend and the tipper’s brother-in-law. Salman was convicted of conspiracy and insider trading in violation of Section 10(b) of the Exchange Act. The Ninth Circuit, parting company with the Second Circuit’s recent treatment of the same issue in Unites States v. Newman, rejected Salman’s argument that his conviction could not stand because there was no proof that his brother-in-law, the alleged tipper, received any pecuniary benefit.
At the Supreme Court, Salman argued that because the insider had made a “gift” of the information to a trading relative and consequently did not receive any pecuniary benefit from the exchange, the evidence failed to establish the personal benefit to the insider required to establish liability under Dirks v. SEC. Under Dirks, a tippee is not liable for trading on information received from an insider unless the insider “personally will benefit, directly or indirectly,” from the disclosure, thus linking the insider’s breach of fiduciary duty to the tippee’s insider trading.
The Supreme Court, relying on Dirks (and partially rejecting the Second Circuit’s opinion in Newman), upheld Salman’s conviction, ruling that an inference of personal benefit is permissible where the tipper makes a gift of confidential information to a “trading relative or friend.” The Court further explained that there is no requirement that the tipper also receive something of a pecuniary or similarly valuable nature in exchange for tipping a friend or relative. The Court left open the question of what degree of closeness would constitute the necessary relationship between the trader and the tipper.