In one of the most watched business cases on the U.S. Supreme Court’s docket this term, the Court on December 6, 2016 unanimously affirmed the Ninth Circuit’s ruling upholding the insider trading conviction of Bassam Salman. Salman had traded on tips he received from the brother of a former Citigroup investment banker; Salman himself was married to the sister of the Citigroup banker. The case raised the question of whether or not the “personal benefit” that the tipper received from passing along the trading information must be pecuniary in nature in order to support an insider trading conviction for the tippee.
The Supreme Court, in an opinion written by Justice Samuel Alito, held that a jury could infer that the tipper personally benefited from making a gift of confidential information to a trading relative. The Court rejected the Second Circuit’s suggestion in its 2014 opinion in U.S. v. Newman that the tipper must also have received something of a “pecuniary or similarly valuable nature.” The Supreme Court’s December 6, 2016 opinion in the Salman case can be found here.
Background
Salman had gained profits of over $1.5 million in trading on inside information he received from a friend and relative-by-marriage, Michael Kara, who, in turn, had received the information from his brother, Maher Kara, a former Citibank investment banker. Maher’s sister is married to Salman (meaning that Michael is Salman’s brother-in-law’s brother). Maher testified at trial that he shared the information with his brother to benefit him; he expected Michael to trade on the information. Michael shared the information with Salman, who knew the information was from Maher. Following trial, a jury convicted Salman of insider trading. Salman appealed to the Ninth Circuit.
In his appeal to the Ninth Circuit, Salman argued that Michael had not received a sufficient “personal benefit” to support his insider trading conviction. Under the Supreme Court’s 1983 decision in U.S. v. Dirks, tippee liability hinges on whether the tipper’s disclosure breaches a fiduciary duty, which occurs when the tipper discloses the information for a personal benefit. A personal benefit, the Court said, may be inferred 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.”
Salman sought to argue in reliance on Newman that there had not been sufficient showing of personal benefit. In overturning the insider trading conviction of two hedge fund managers, the Second Circuit had said in Newman that Dirks does not permit a factfinder to infer a personal benefit to the tipper from the gift of confidential information to a relative or friend unless the gift of the information “generates and exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or a similarly valuable nature.”
The Ninth Circuit declined to follow Newman and affirmed Salman’s conviction, holding that the jury could infer that the tipper had breached a duty because he made a “gift of confidential information to a trading relative.”
The U.S. Supreme Court granted Salman’s petition for a writ of certiorari in order to resolve the “tension” between the Ninth and Second Circuits.
The December 6, 2016
In a December 6, 2016 opinion written by Justice Samuel Alito for a unanimous court, the U.S. Supreme Court affirmed the Ninth Circuit’s holding upholding Salman’s insider trading conviction. Justice Alito said that the Court would “adhere” to its prior decision in Dirks, which, he wrote, “easily resolves “the narrow issue presented here.”
The Court reiterated that under Dirks, a tippee is exposed to insider trading liability only if the tipper breached a fiduciary duty in providing the information. Under Dirks, a breach of the duty may be inferred if the tipper received a personal benefit. The disclosure of confidential information “without personal benefit it not enough.” However, a gift of confidential information to a trading relative or friend is sufficient to satisfy this personal benefit requirement.
In reaching this conclusion, Justice Alito wrote that providing the information on which the tippee traded and from which the tippee profited is no different than trading by the tipper followed by the gift to the tippee of the trading proceeds. By disclosing confidential information to his brother with the expectation that he would trade on it, Maher breached his duties to Citigroup and its clients, a duty that Salman acquired and breached when he traded on the information with full knowledge that it had been improperly disclosed. Salman’s conduct, Justice Alito wrote, is “in the heartland of Dirks’s rule concerning gifts of confidential information to trading relatives.”
Justice Alito added that to the extent the Second Circuit’s Newman decision held that a tipper must also receive something of “pecuniary or similarly valuable nature” in exchange for a gift of information to a trading relative, that rule is inconsistent with Dirks.
Discussion
The Supreme Court’s Salman decision in a clear victory for prosecutors, who had chafed under the Second Circuit’s requirement in the Newman case of a showing of “pecuniary” benefit to a tipper in order to support a tippee’s conviction for insider trading. The Supreme Court’s ruling in Salman should make it easier for prosecutors to pursue insider trading cases, at least where the tippee receives the inside information from a relative or friend.
As Greg Stoher noted in his December 6, 2016 Bloomberg article about the decision (here), a number of high-profile insider trading defendants had been watching the Salman case with keen interest. Among others, former Goldman Sachs director Rajat Gupta and Galleon Group co-founder Raj Rajaratnam, among others been trying to overturn their convictions in reliance on arguments similar to those raised by Salman. The Court’s decision in Salman may disappoint some of their hopes.
It is worth noting that in his opinion, Justice Alito did not directly address the Government’s argument that a gift of confidential information to anyone, not just a trading relative or friend, is enough to establish insider trading liability of the recipient of the information trades on the information. Justice Alito wrote that under Dirks, a tipper breaches a fiduciary duty by making a gift of confidential information to a “trading relative,” and that rule is “sufficient to resolve the case at hand.” The Court did not address the question of whether a gift of the confidential information to someone who is not a relative or friend would be sufficient to support an insider trading conviction for the tippee, or what degree of friendship or kinship suffices. The court left open the possibility that it might need to address “difficult” scenarios in future cases, it saw no need to do so here, because Salman’s conduct falls within the “heartland” of the conduct envisioned by Dirks.
As Amy Howe noted in her December 6, 2016 post about the Salman decision on the SCOTUS Blog (here), the 8-0 Court unanimity and the brevity of the 12-page opinion, along with the speed with which the eight-judge panel delivered its opinion (two months after oral argument) “belie the significance of the ruling.” In the Court’s first insider trading decision in two decades, the court rejected the Second Circuit’s suggestion that pecuniary gain is necessary to support of showing personal benefit and makes it clear that conduct like Salman’s “falls squarely within the insider- trading laws.”