Earlier this morning, the U.S. Supreme Court upheld a conviction for insider trading and resolved a split between the Second and Ninth Circuits regarding tippee liability.  In Salman v. United States, the Supreme Court analyzed the flow of non-public information through three people: Maher Kara, a former investment banker at Citigroup, his brother Michael Kara, and Maher’s brother-in-law, Bassam Salman.  Maher provided inside information about mergers and acquisitions to Michael.  Michael passed along the confidential information to his close friend, Salman, who then traded on it.  Convicted of insider trading as a tippee, Salman appealed to the Ninth Circuit, which upheld the conviction based on the Supreme Court’s decision in Dirks v. SEC.  On December 6, 2016, the Supreme Court affirmed the Ninth Circuit based on the principles articulated in Dirks.

Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 prohibit undisclosed trading on inside corporate information—and the tipping of such information to others—by persons bound by a duty of trust and confidence not the exploit that information for their personal advantage.  A tippee who receives inside information knowing that its disclosure breached the tipper’s duty acquires that duty and may be liable for securities fraud if he trades on it.  Relying on the Second Circuit’s decision in United States v. Newman, Salman argued that he was not guilty of insider trading because he was “several steps removed” from the corporate insider (Maher), and there was no evidence that Maher had received anything of “a pecuniary or similarly valuable nature” in exchange or that Salman knew of such a benefit.  A unanimous Supreme Court rejected Salman’s argument.  Distinguishing Newman and applying Dirks, the Court held that a tipper benefits personally by making a gift of confidential information to a trading relative or friend.  Here, Maher benefited by gifting tips to his brother Michael.  Thus, Salman, who later traded on those tips, was also liable for insider trading.

According to the Court, the type of question posed by Salman fits squarely within the Dirks framework.  Dirks established that the tipper of non-public information to a trading relative or close friend benefits personally “because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”  Anyone who later trades on this information, knowing its confidential nature, is exposed to liability as a tippee because he has acquired and breached the tipper’s fiduciary duty.  The net result of Salman is that Dirks remains the law of the land for tippee liability, and Newman is much more narrowly constrained.  As a result, a significant hurdle has been removed from prosecutors attempting to prove tippee liability.

A copy of the Court’s slip opinion is linked here.

Keesal, Young & Logan Securities Group

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