Salman v. United States, 580 U.S.__ (2016) Insider Trading, What Does the Tipper Have to Get for it to be Criminal?
Short answer: Nothing.
Longer answer: Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)(5) prohibit undisclosed trading on inside corporate information by individuals who are under a duty of trust and confidence (“fiduciary duty”) that prohibits them from secretly using that information for personal advantage. This is typically called “insider trading.” If someone does this, they are subject to criminal and civil liability. But ALSO, these people who have the insider information, may not give that information to others for trading, either. The “tippee” acquires the “tipper’s” duty to disclose, or duty to abstain from trading, if the tippee knows the information was disclosed in breach of the tipper’s duty. In Dirks v. SEC, 463 U.S. 646 (1983), the Court held a tipper breaches his or her fiduciary duty when the tipper discloses the inside information for personal benefit. A jury can infer personal benefit where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” Id. at 664.
Here, Salman challenged his convictions for insider trading. Salman received trading tips from an extended family member who had received the information from Salman’s brother-in-law. Salman traded on that information. He argued that he could not be held liable as a tippee because the tipper (his brother-in-law) did not personally receive money or property in exchange for the tips and therefore did not personally benefit from them. The Second Circuit Court of Appeals disagreed and held that Dirks allowed the jury to infer that the tipper breached a duty because he made a “gift of confidential information to a trading relative.” 792 F.3d 1087, 1092 (CA9 2015).
Maher Kara was an investment banker with Citigroup. He handled matters of mergers and acquisitions involving Citigroup’s clients. Kara was close to his older brother, Mounir Kara (“Michael”). He began discussing his work with Michael. Michael began to trade on the information he was getting from his brother regarding these mergers and acquisitions. Michael began to feed this information to others, including Salman. Maher knew about it. Salman knew the information was coming to him by way of the breach of a fiduciary duty. By the time the authorities caught on, Salman made over $1.5 million in profits that he split with another relative who executed trades on Salman’s behalf. After he was convicted, Salman was sentenced to 36 months of prison and $730,000 in restitution.
The Court had little problem finding a violation here which is not surprising. As it held in Dirks, a tippee is exposed to liability for trading on inside information only if the tippee participates in a breach of the tipper’s fiduciary duty. Whether the tipper breached that duty depends “in large part on the purpose of the disclosure” to the tippee. 463 U.S. at 662. “[T]he test is whether the insider personally will benefit, directly or indirectly, from his disclosure.” Ibid. Specifically, the Court found that “[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.”
So, it does not matter that the initial tipper did not receive any monetary or other financial reward. What matters is that the information to Michael was a “gift of confidential information to a trading relative” and that Salman knew that when he traded. The Court found Salman’s conduct “in the heartland” of Dirks‘s rule concerning gifts:
It remains the case that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” 463 U.S., at 664. But there is no need for us to address those difficult cases today, because this case involves “precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.” 792 F.3d 1092 (quoting 463 U.S., at 664).