United States: Supreme Court Leaves Remote Tippee Liability Unresolved In Salman v. United States

Ruling in its first insider-trading case in two decades, a unanimous Supreme Court in Salman v. United States, reaffirmed the test first articulated in Dirks v. SEC, 463 U.S. 646, 664 (1983), that a jury can infer a "personal benefit" to the tipper – and thus a breach of the tipper's fiduciary duty – where the tipper "makes a gift of confidential information to a trading relative or friend."

In Salman v. United States, Maher Kara was an investment banker in Citigroup's healthcare investment banking group with access to highly confidential information about mergers and acquisitions involving Citigroup's clients. He had a very close relationship with his brother, Michael, who, in-turn, had a very close relationship with Salman, Michael's friend and Maher's brother-in-law. It was not disputed that Maher assisted his brother Michael's trading by sharing inside information about mergers and acquisitions, nor was it contested that the inside information – the "tips" – were shared with Salman "any time a major deal came in." By the time the authorities caught on, prosecutors estimated that Salman had made over $1.5 million in profits that he split with another relative who executed trades via a brokerage account on Salman's behalf. There was no evidence that the original tipper, Maher, received any pecuniary benefit from the insider disclosures. After a jury trial, Salman was convicted on all counts.

During the pendency of Salman's appeal, the Second Circuit decided United States v. Newman, 773 F.3d 438 (2014), cert. denied, 577 U.S. ___(2015). There, the Second Circuit reversed the convictions of two portfolio managers who traded on insider information. Distinguishable from Salman, the Newman defendants were "several steps removed from the corporate insiders" and the court found there was "no evidence that either was aware of the source of the inside information" and no evidence that the tipper personally benefitted from the disclosure of his confidential information to a close personal friend. 773 F.3d at 334. The court concluded that in the absence of a meaningful relationship that "generates an exchange that is objective, consequential, and represents at least a potential gain of pecuniary or similarly valuable nature," there could be no conviction for insider trading. 773 F.3d at 1087.

Pointing to Newman, Salman argued that his conviction should be reversed in the absence of any evidence that Maher received a "personal benefit" of "a pecuniary or similarly valuable nature." Judge Rakoff, sitting by designation, wrote the opinion for the Ninth Circuit, affirming the conviction, reasoning that the case was controlled by Dirks's holding that a gift alone to a trading relative or friend is sufficient to infer a "personal benefit." After rejecting the petition in the Newman case, the Court granted cert in Salman to resolve this apparent disagreement between the two Circuits.

Writing for the unanimous Court, Justice Alito sided with the Ninth Circuit, adhering to the Dirks precedent. He reiterated that the test is whether the "insider personally benefited, directly or indirectly from his disclosure," that such personal benefit can be gleaned from "objective facts and circumstances" and that – as one such circumstance – a tipper breaches a fiduciary duty by making a gift of confidential information to a trading relative. By disclosing confidential information as a gift to his brother, Maher breached his duty of trust and confidence to Citigroup and its clients. In such situations, the tipper benefits personally because giving a gift of trading information is, in essence, the same as trading by the tipper followed by a gift of the proceeds. Thus, to the extent that Newman "held that the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends," the Court agreed that "this requirement was inconsistent with Dirks."

The result in Salman was widely expected, and though the decision gives the government more leeway to pursue "friends and family" insider-trading cases, the Court declined to resolve a core aspect of the Newman decision that distinguishes it from Salman. In Newman, the Second Circuit also reversed the defendants' convictions because the government introduced no evidence that the defendants knew the information they traded on came from insider sources or that the insiders received a benefit. The thornier question of whether a tippee is required to have knowledge of the inside source and benefit to the insider remains unsettled. Newman's holding requiring such knowledge, at least in the Second Circuit, therefore survives the Salman decision. The question of what constitutes a "personal benefit" and what type of close personal relationship will qualify as conferring such a benefit also remains open under Newman and under the narrow, fact-driven holding of Salman. In short, remote tippee liability likely will remain difficult to prosecute for the government.

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