On December 6, 2016, the United States Supreme Court issued a unanimous decision in Salman v. United States,1 affirming what it had set out in dicta in its 1983 decision in Dirks v. SEC2 by finding that a factfinder may infer that a tipper receives a “personal benefit” where the tipper “makes a gift of confidential information to a trading relative or friend.”3 While this decision is undoubtedly a huge victory for prosecutors and securities regulators, it is in fact a narrow one. The Court's holding is consistent with and relied upon the Court's seminal decision in Dirks, which reasoned that for a tippee to be liable for insider trading, the tipper must receive a personal benefit. The Court in turn rejected the Second Circuit's broader conclusion in U.S. v. Newman4 that, when dealing specifically with trading relatives and friends, a tipper must receive "something of a pecuniary or similarly valuable nature in order for there to be insider trading liability."5 The Supreme Court’s decision was both legally sound and reached the correct result under Dirks and the remainder of Newman, with the Court unanimously agreeing that gifting and then trading on inside material nonpublic information between relatives should be prohibited.
While some may find this to be a complete repudiation of Newman, it is, in point of fact, not. The two sets of first-level tippers and tippees in Newman were not relatives, but were respectively “casual acquaintances” and friends who were not “close.” The defendants in Newman also were three or four degrees removed from the tippers. The Second Circuit, citing Dirks, found that a tippee can be found liable only where a tipper breaches his or her fiduciary duty, and that in order for the tippee to acquire this duty the tippee must have known or should have known of the tipper’s breach, i.e., that the tippee knew that the information was confidential and that it was divulged for a personal benefit. The Second Circuit, at least partially, reversed the defendants’ convictions because the government did not introduce evidence that the defendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips.6 The Supreme Court in Salman acknowledged that these issues remain untouched by its new decision.7 Thus, the decision implicates a very narrow portion of Newman, and it is likely the Court would have affirmed the Second Circuit’s decision based upon the facts and evidence in that case. In sum, from our perspective, the results by both the Supreme Court in Salman and the Second Circuit in Newman were proper.
Maher Kara, the tipper, was an investment banking analyst for Citigroup. Maher gave his older brother, Mounir Kara (known as Michael), the tippee, confidential information about anticipated mergers and acquisitions involving Citigroup clients. Michael traded on this information. While Maher was initially unaware that his brother was trading on the information he was providing him, he eventually suspected that his brother was doing so and soon began to more actively provide information to his brother to assist his trading. Without his brother’s knowledge, Michael also passed the information on to his brother-in-law, Bassam Salman, the remote tippee in the case. Salman traded on the information and eventually made over $1.5 million in profits. Salman was indicted on one count of conspiracy to commit securities fraud and four counts of securities fraud, and the case eventually went to trial.
Maher and Michael, who were both confronted with charges of their own, pleaded guilty and testified at Salman’s trial. Their testimony revealed their “very close relationship.” Maher testified that he provided the information to his brother to “help him” and fulfill “whatever needs he had.” Maher also testified about a specific instance where Michael called his brother asking for a “favor.” Michael rejected Maher’s offer of money and specifically requested information, which Maher provided. Michael testified that he told Salman that Maher was the source of all the information Michael provided to him.
At trial, Salman’s jury was instructed that a “personal benefit” under Dirks includes “the benefit one would obtain from simply making a gift of confidential information to a trading relative.”8 The jury ultimately convicted Salman on all counts. Salman appealed to the Ninth Circuit, arguing that, under Newman, a factfinder can infer a personal benefit to the tipper from a gift of confidential information to a trading relative or friend only where there is a proof of a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary nature,” which was absent in the case.9 The Ninth Circuit, however, affirmed Salman’s conviction, finding that Maher’s gift to Michael was “precisely the gift of confidential information to a trading relative that Dirks envisioned.”10 The Supreme Court granted Salman’s petition for a writ of certiorari to determine whether a tipper personally benefits merely by gifting confidential information to those with whom the tipper shares a relationship as a relative or friend, as in Salman, or whether this requires proof of a pecuniary gain by the tipper, as in Newman.
Before the Supreme Court, Salman again relied on Newman in an attempt to overturn his conviction. He argued that, in the context of an insider’s gift of confidential information to a trading relative or friend, a tipper does not personally benefit unless the tipper’s goal in disclosing inside information is to obtain “money, property, or something of tangible value.”11 Salman also cautioned the Court that defining a gift as a personal benefit would render the offense of insider trading indeterminate, because liability may turn on facts such as the closeness of the tipper and tippee’s relationship and the purpose of the disclosure, and overbroad, as the Government can simply argue that the tipper meant to give a gift to the tippee without proving a concrete personal benefit.
The Government, on the other hand, took an expansive position as to the definition of a personal benefit, arguing that, under Dirks, a gift of confidential information to anyone, not just a trading relative or friend, is enough to prove securities fraud. Under this view, the Government reasoned that a tipper personally benefits whenever the tipper discloses nonconfidential information for a noncorporate purpose.
The Court ultimately ruled in the Government’s favor and upheld Salman’s conviction. The Court relied on Dirks, finding that it “easily resolves the narrow issue presented here,” as it provides a “simple and clear guiding principle”: that a tipper personally benefits by making a gift of confidential information to a “trading relative” without anything more.12 Under these circumstances, the tipper benefits personally because giving a gift of trading information “is the same as trading by the tipper followed by a gift of the proceeds.”13 Maher sought to provide the confidential inside information to his brother so that Michael could trade on it, and Maher thus benefited personally. The Court found Newman to be inconsistent with Dirks “[t]o the extent the Second Circuit held that a tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends.”14
While the Court rejected Salman’s arguments as to his concerns in defining a gift as a personal benefit, the Court expressed that “in some factual circumstances assessing liability for gift-giving will be difficult” and that “determining whether an insider personally benefits from a particular disclosure … will not always be easy for courts.”15 The Court also did not accept the Government’s argument that a personal benefit could be found by a gift of confidential information to anyone, not just a trading relative or friend.
In light of the Salman decision, there are certain key takeaways to be considered going forward.
First, prosecutors and securities regulators will likely see Salman as a complete abandonment of Newman and an expansion of the Government’s enforcement powers in insider trading actions. For instance, on the day of the decision, Preet Bharara, who was on the losing side in Newman, released a statement that said in part that the Salman decision “‘easily’ rejected the Second Circuit’s novel reinterpretation of insider trading law in U.S. v. Newman.”16 As set forth above, this is far from the case.
Second, while Salman is a “narrow” decision, its limits are in fact unclear. The Court acknowledged that it did not have to resolve “difficult” factual circumstances in reaching its decision. It remains to be seen how courts will interpret what a “friend” is or the degree to which two parties are relatives.
Third, it will be important to train securities personnel, particularly at hedge funds, to make inquiries as to the sources of information that is to be used in securities analysis. Portfolio managers, such as in Newman, will want to have some comfort that their colleagues have not obtained improper confidential information from someone they know or could be considered “friends” with at a company for which the fund might trade the company’s securities or debt.
Finally, the decision should compel companies to have a renewed focus on their internal policies, procedures, and training. These internal policies and procedures need to make clear that employees who receive material nonpublic information cannot share this information with anyone, because the act of doing so risks triggering insider trading liability exposure.