On December 6, the U.S. Supreme Court issued its eagerly anticipated ruling in Salman v United States, unanimously affirming the 9th Circuit’s affirmance of Salman’s guilty verdict for insider trading. The Court affirmed the verdict even though the insider did not receive a tangible personal benefit in return for tipping his brother, who in turn tipped Salman, about material nonpublic information. In so doing, the Supreme Court also overruled the 2nd Circuit’s holding in Newman, to the extent it had required in all cases that a tipper to a family member or friend must personally receive a pecuniary benefit or its virtual equivalent before he can be found to have breached his fiduciary duty, a predicate to criminal liability for the tipper and any direct or indirect tippees.
The case involved Maher Kara, then an investment banker in Citigroup's healthcare investment banking group, who gave his brother Michael Kara nonpublic information about pending mergers and acquisitions involving Citigroup clients. Maher admitted that he shared this information with his brother due to their close relationship and a desire to help his brother financially. In turn, Michael shared the information with Salman, who then traded and made profits of over $1.5 million.
Emphasizing that its holding was a narrow and easy one, the Court held that Maher's provision of inside information to his brother for use in trading was equivalent to Maher trading on the information himself and then remitting the profits to his brother. Thus, the Court held that Maher received a personal benefit in the form of a gift to his brother. This, the Court held, falls "in the heartland" of Dirks v.SEC, the Supreme Court's 1983 decision that established the personal benefit requirement. In its decision, the Court overruled Newman to the extent that it held that a tipper to a family member or friend must personally receive a pecuniary benefit before he can be found to have breached his fiduciary duty and therefore be held criminally liable for insider trading. The Court reiterated its holding from Dirks that determining whether an insider personally benefits from a disclosure of information remains a difficult fact question, while emphasizing that its current holding is limited to the narrow issue of whether a tipper receives a pecuniary benefit by providing material nonpublic information to a relative or friend who he knows intends to trade on the information.
Because the Court emphasized that its ruling was narrow, the Salman decision's impact on insider trading jurisprudence is yet to be determined. Importantly, the decision does not affect the requirement that the tippee have knowledge that the tipper had received a personal benefit in exchange for the tips, which was a second basis for the Second Circuit's reversal of the convictions in Newman. Thus, in cases involving remote tippees, the Government will still need to prove that the tippee knew that the original source of the information received a personal benefit for disclosing it. But, after Salman, it is clear that in the case of a relative or friend, the benefit to the tipper need not be directly pecuniary, but can be the delivery of inside information.
For the Government and defense, the next battle line is likely to be drawn over whether a relationship between a tipper and tippee is sufficiently close to make them "friends" or something akin to a relative, and thereby eliminate the requirement that the tipper receive a tangible benefit in return for his information. In addition, the Supreme Court left open the Government's argument that a "gift" of inside information to anyone, not just a trading relative or friend, is sufficient to prove securities fraud, so this ruling may embolden the Government to continue to test that theory in future prosecutions.