A gift of confidential information from a tipper to a trading friend or relative constitutes sufficient personal benefit to the tipper to sustain a conviction of the tippee for insider trading under Section 10(b) of the 1934 Act.
Salman vs. USA, Dkt. No. 15-628 (U.S. Sup. Ct., 12/6/16).
A Circuit Split and a Family Affair
This highly anticipated opinion by Justice Samuel Alito unanimously affirms the Ninth Circuit’s decision in USA v. Salman, upholding defendant tippee’s Section 10(b) conviction for insider trading based on the “gift” theory of “personal benefit” first alluded to in Dirks v. SEC, 46 U.S. 646 (1983). In so holding, the Court reaffirms Dirks’ proposition that “a gift of confidential information to a trading friend or relative” is sufficient personal benefit to a tipper to impose insider trading liability on a tippee with knowledge of the gift. At the same time, noting “the tension between the Second Circuit’s [decision in United States v. Newman, 773 F.3d 438 (2014), cert. denied, 577 U.S.___] and the Ninth Circuit’s decision in this case,” the Court sides with Salman. “To the extent that Newman went further and required additional gain to the tipper,” the Court refuses to follow it.
The facts of Salman are both compelling and straightforward. The original source of the tips at issue was defendant Salman’s brother-in-law, Maher Kara, an investment banker at Citigroup, who gave the information to Salman’s immediate source, Michael Kara, Maher’s brother and best man at his wedding to Salman’s sister. Michael testified that Salman knew that the brothers enjoyed “a very close relationship,” and that Maher was the source of the confidential information. Notwithstanding these facts, and pointing to Newman, Salman argued that his conviction should be reversed on the ground that there was no evidence that Maher, the initial tipper, received anything of pecuniary or similar value for the tips.
The Gift of Giving
The Court disagrees. Under Dirks, it explains, a tipper breaches a fiduciary duty when he discloses confidential information “for a personal benefit,” in the form of either “something of value” or a “gift of confidential information to a trading relative or friend.” Moreover, “giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” In either case, the tipper receives and then transfers “something of value.” Had Maher personally traded on the information and then given the proceeds to his brother as a gift, he would have breached his duty. Maher effectively achieved the same result by disclosing the information. And, in fact, on at least one occasion, Maher offered Michael money, but Michael requested and received valuable trading information instead. Though Maher, the original tipper, did not know that Salman was trading, the evidence established that Salman knew of the gift. Maher breached his duty of trust and confidence to Citigroup and his clients when he gifted the confidential information to Michael, and, according to the Court, Salman acquired the same duty through Michael and breached it when he traded on the information with full knowledge of its source.
Simple and Clear
In so holding, the Court rejects Salman’s arguments that defining a gift as a personal benefit is either “indeterminate,” because liability may turn on the closeness of the relationship between tipper and tippee, or “overbroad,” because the government may avoid having to prove a “concrete” personal benefit. But neither does it accept the government’s argument that a gift of confidential information to just “anyone” is enough to prove securities fraud. Rather, the Court “adheres to Dirks, which easily resolves the narrow issue presented here.” Though noting that determining personal benefit, a question of fact, will not always be easy, again citing Dirks, the Court finds that such benefit can be inferred from objective facts and circumstances such as a relationship suggesting a quid pro quo or an intention to benefit.
The Court also rejects any notion that Dirks’ “gift-giving standard,” which it characterizes as “a simple and clear ‘guiding principle’” is unconstitutionally vague “as applied to this case.” As the government conceded, in order to gain a conviction, it must still prove beyond a reasonable doubt that the tipper expected the information to be used for securities trading and that the tippee knew of the tipper’s breach. Here, Salman’s jury was properly instructed that a personal benefit includes the benefit one would obtain simply from making a gift.
(D. Franceski: *After much anticipation, and especially given the denial of certiorari in Newman, the Supreme Court’s Salman opinion is, to say the least, a bit underwhelming. It appears to have resolved little beyond elevating to holding the “gift to trading relatives and friends” dictum of Dirks. It is carefully confined to the facts of the case, it does not offer much, if any, insight into the Court’s view of what constitutes a friend, relative or gift beyond these obvious facts, and it essentially side-steps a number of still troubling and difficult issues: who is a trading relative or friend, how important is the status of the recipient to the existence of a “gift,” whether or what other intangible benefit is enough, or how, if at all, does the “simple guiding principle” apply to remote tippees post-Newman. One might also wonder exactly what transfer of such information would not be “a gift to a trading relative or friend,” as it would be the rare case, indeed, that a tipper would be tipping a complete stranger. And finally, if all such transmittals so easily fit the Dirks “gift” profile, how truly high a hurdle is proof of “personal benefit” post-Salman? **In a footnote, the Court notes that the government in Newman did not prove that the defendants knew that the information they traded on came from an insider. ***We previously summarized the decision of the Ninth Circuit below in SLA 2016-05, and we covered other proceedings against the Kara brothers in SLAs 2016-12 and 2009-43. ****Salman was the subject of our last feature article.)
(SLC Ref. No. 2016-47-01)
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