United States: New Insider Trading Ruling: 7 Things You Should Consider To Avoid Criminal Prosecution

In its first insider trading ruling in almost 20 years, the U.S. Supreme Court upheld a ruling by the 9th Circuit Court of Appeals that a person can be held criminally liable for passing inside information to a friend or relative, even if the tipper does not receive a financial benefit from the tip. The Supreme Court's decision will make it easier to prosecute insider trading cases and should serve as a reminder that no one should trade on or pass on to others to trade on, confidential, non-public information about a company. Otherwise, it may result in criminal prosecution.

Insider trading generally involves a person in possession of non-pubic information about a company trading on that information, either making a profit or avoiding a loss. In this case, Maher Kara, an investment banker, passed a tip to his brother, Michael Kara, who passed the tip to his brother-in-law, Bassam Salman, a Chicago grocery wholesaler, who then (with another relative) traded on the tips, netting over $1.5  million on the trades. Neither Kara brother received any financial or other tangible benefit from the Salman's trades. Under the 2nd Circuit's analysis, Salman likely would not have been liable for his trades as there was no financial benefit or potential for a financial benefit to the tippers. However, the 9th Circuit Court of Appeals upheld his conviction holding that a tipper benefits personally by making a gift of confidential information to a trading relative or friend.

The U.S. Supreme Court resolved the conflict between the 2nd and 9th Circuits by rejecting the assertion that liability for insider trading requires a financial or other tangible personal benefit to the tipper. A benefit to the tipper may be inferred when a tip is made to a family member or friend.

Following this decision, corporate insiders, family and friends of corporate insiders should be mindful of the following:

  1. It does not matter whether the one passing on a tip receives any financial benefit or value from passing on the tip to a family member or friend. A benefit may be inferred.
  2. The decision does not address the closeness of the relationship that may be required to constitute a "friend" for purposes of liability from receiving a "gift" of a tip. One should not assume a "casual" relationship with a tippee will insulate a tipper from liability. The fact that confidential information has been tipped to an acquaintance may give rise to an inference that there is a close relationship with the tippee.
  3. Passing on confidential information about a company may not result in liability. To be liable for insider trading, the tipper must expect that the confidential information he tipped would be used in securities trading and the tippee receiving the information must know that the tipper breached a fiduciary duty in disclosing the information (i.e., knew that the tipper expected some benefit from the tip and expected that trading could result from the information).
  4. One should not assume that passing a confidential tip to a person who is not a family member or friend requires a financial benefit to the tipper for insider trading liability. The Court noted that some direct or indirect personal benefit to the tipper is required, but that personal benefit may be in the form of financial gain, a reputational benefit or other benefit from a quid pro quo relationship between tipper and tippee.
  5. A fiduciary duty to protect confidential information applies not just to corporate insiders but also to those who have a professional relationship with the company (such as lawyers, accountants, bankers, investment managers or other service providers) that permits access to confidential information that the company expects the provider to protect.
  6. In order to avoid liability, those who come into possession of confidential information about a company knowing the information is meant to be protected should take care to preserve the confidentiality of the information. Telephones, laptops and computers that contain confidential information should be password protected. Hard documents containing confidential information should be marked accordingly and kept in a protected place. Failure to do so could result in unauthorized access to and use of the confidential information and give rise to an assertion that the person who had the information and failed to protect it knew or reasonably should have known that the protected information would be accessed and then used for trading.
  7. Care should be used to avoid discussing information about a company, employer or client on social media to prevent inadvertent disclosure of confidential information about that employer or client.

The full court opinion in Salman v. United States can be found at the following link: https://www.supremecourt.gov/opinions/16pdf/15-628_m6ho.pdf. The 9th Circuit opinion in United States v. Salman can be found at the following link: http://www.scotusblog.com/wp-content/uploads/2016/01/14-10204.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Rebecca H. Forest
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