Government Enforcement Update
The Supreme Court issued its decision in Salman v. United States on Tuesday, unanimously affirming the conviction of Petitioner Bassam Salman. Following a circuit split on the issue of “gift-giving” and personal benefits, the Supreme Court granted certiorari in Salman, taking on its first insider trading case in two decades. In its opinion, the Supreme Court clarified its 1983 ruling in Dirks v. SEC, confirming that it can be inferred that a tipper receives a personal benefit when he or she makes a gift of confidential information to a trading relative or friend. The decision is being hailed as a victory for prosecutors, who had slowed their previously aggressive pursuit of insider trading cases involving tipping chains in the wake of the Second Circuit’s decision in United States v. Newman in 2014. The Newman opinion cast uncertainty on what constitutes insider trading and the elements that needed to be established. Tuesday’s opinion settles the law in favor of a broader interpretation of the benefit necessarily received by a tipper of inside information before the tipper or tippees can be liable for trading on that information.
Salman was convicted in 2013 of conspiracy and insider trading, after he conducted trades based on information that he received from his brother-in-law. Maher Kara, brother to Salman’s wife and a former investment banker at Citigroup, shared confidential information about Citigroup with his brother, Michael Kara, on multiple occasions. Michael, in turn, shared the information he received from Maher with Salman. Both Michael and Salman executed trades based on the information from Maher, resulting in Salman making over $1.5 million in profits. At trial, testimony established that Maher shared the confidential information with Michael because he wanted to help his brother, and that Salman was aware that the information came from Maher.
During the pendency of Salman’s appeal, the Second Circuit decided Newman, overturning the insider trading convictions of petitioners Todd Newman and Anthony Chiasson. The legal issue squarely presented in Newman was whether a tippee must have knowledge of the personal benefit to the tipper in order to be held liable for insider trading. The Second Circuit held that in order to sustain a conviction for insider trading, the evidence must demonstrate that the tippee knew both that the tipper breached a fiduciary duty by disclosing confidential information and that the tipper disclosed such information for a personal benefit. In evaluating the sufficiency of the evidence, the court went on to discuss whether the tippers in Newman had received any personal benefit. In doing so, the court strongly suggested that a personal benefit to the tipper could not be automatically inferred from a personal relationship between the tipper and tippee. Indeed, the Second Circuit held that “such an inference is impermissible in the absence of 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 or similarly valuable nature.”
In the Ninth Circuit, Salman challenged his convictions for conspiracy and insider trading, imploring the court to apply the personal benefit standard articulated in Newman. In accordance with the Newman decision, Salman argued that he could not be held liable as a tippee because the tipper, Maher, did not receive money or anything similarly valuable in exchange for disseminating the inside information. The Ninth Circuit rejected Salman’s argument, interpreting Dirks to allow a jury inference that a tipper received a personal benefit if the tipper gifted confidential information to a trading family member or friend.
The Supreme Court found that Dirks “easily” resolved the dispute in favor of the Ninth Circuit’s broader interpretation of what may constitute a personal benefit. Specifically, the Court pointed to what it referred to as “the gift-giving principle” articulated in Dirks: “[t]he elements of fiduciary duty and exploitation exist when an insider makes a gift of confidential information to a trading relative or friend.” Giving a gift of trading information to a relative or friend is essentially identical to the tipper trading himself and gifting the proceeds from the trade to the tippee. Based on this principle, and the facts of the case, the Supreme Court found that the Ninth Circuit was correct in holding that the jury could infer that Maher had personally benefited from disclosing inside information to Michael, because he was aware that his brother would conduct trades based on the information and that he would benefit from those trades.
As a result of the Salman opinion, the Supreme Court abrogated the portion of the Second Circuit’s opinion in Newman which suggested that a tipper must receive money or something similarly valuable in exchange for a gift of information to a family member or friend to constitute a personal benefit. That portion of the Newman opinion was something of a surprise, a change in the way the law of insider trading had been interpreted by most prosecutors since Dirks. On the issue most squarely presented by the parties in Newman, the holding that a tippee must have knowledge that the tipper received a personal benefit remains good law in the Second Circuit.