On December 6, 2016, the U.S. Supreme Court issued its decision in Salman v. United States, 580 U.S. ___ (2016), a ruling that makes obtaining insider trading convictions far easier for the government in cases where an insider provides trading tips to a relative or friend.
In Salman, the Court upheld the convictions of Bassam Salman for conspiracy and insider trading. Salman received insider trading tips from a friend, who, in turn, had received the information from his brother (and Salman’s brother-in-law), a former investment banker at Citigroup.
The Court followed its decision in Dirks v. SEC, 463 U.S. 646 (1983), which held that the liability of a tippee (i.e., one who receives an insider trading tip from a tipper) for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the inside information. A tipper’s fiduciary duty is breached when the tipper discloses inside information for a “personal benefit,” which includes the scenario where an insider provides a tip to a “trading relative or friend.”
Salman’s argument was based on the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, 577 U.S. ____ (2015), which held that, to be found guilty of insider trading, the tipper must receive something of a “pecuniary or similarly valuable nature” when conveying insider information to a trading relative or friend. Salman argued that the gift of insider information alone to a friend or family member is insufficient to establish the personal benefit required for tippee liability, because the tipper does not personally benefit unless the tipper obtains money, property, or something of tangible value. The prosecution argued that such a pecuniary benefit is not necessary for a tippee to be found guilty of insider trading. Thus, the issue decided by the Court was whether a gift of insider information to a friend or relative, without any pecuniary benefit to the tipper, violates securities laws.
The Court rejected Salman’s argument, noting that Dirks easily resolved the narrow issue presented in the case. In Dirks, the Court held that an insider breaches his fiduciary duty by making “a gift of confidential information to a trading relative or friend.” In such cases, the tip and trade resemble trading by the insider followed by a gift of the profits to the recipient. Therefore, it is inconsequential that a tipper receives no monetary or personal benefit from providing insider information. The Court found that to the extent that the Newman court held that the tipper must also receive something of a “pecuniary or similarly valuable nature” in exchange for a gift to family or friends, this requirement is inconsistent with Dirks.
The key takeaway from this decision is that a tipper providing insider trading information to a trading relative or friend does not need to receive a tangible benefit (e.g., money or property) in exchange for providing insider information to be found guilty of insider trading, making the prosecution’s job much easier in these cases. If you have any questions regarding this, please contact Mark Berube.