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Supreme Court Rules on Insider Trading Involving Family and Friends

In its first insider trading decision in nearly two decades, the US Supreme Court ruled unanimously to uphold an insider trading conviction of an individual (tippee) who traded while aware of material non-public information (MNPI) received from a friend (tipper) who did not receive a financial benefit for providing the tip. Salman v. United States, No. 15-628, 2016 WL 7078448 (U.S. Dec. 6, 2016). The ruling, written by Justice Samuel Alito, settles a split of authority between the US Court of Appeals for the Second and Ninth Circuits regarding whether a tipper receives a “personal benefit” for purposes of establishing insider trading liability by simply conveying MNPI to a family member or friend.

The defendant in the case, Bassam Salman, had been convicted for trading on MNPI regarding pending mergers and acquisitions he learned from his friend, Michael Kara. Mr. Kara was tipped off by his brother, Maher Kara, an investment banker and also Mr. Salman’s future brother‑in‑law. Mr. Salman had argued that he was wrongfully convicted because Mr. Maher did not receive money or anything else of tangible value for passing along the MNPI. In doing so, Mr. Salman had relied upon the Second Circuit’s landmark Newman decision, which held that a personal benefit may not be inferred from a personal relationship between the tipper and tippee, absent “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.” United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014). The Second Circuit determined that such a finding “requires evidence of ‘a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].’” Id. The Ninth Circuit, in upholding Mr. Salman’s jury conviction, had rejected the Second Circuit’s position, finding that the unlawful insider trading element of breach of fiduciary duty is met where an “insider makes a gift of confidential information to a trading relative or friend,” as stated by the Court in its 1983 decision in Dirks v. SEC. 463 U.S. 646, 664 (1983).

In its Salman opinion, the Court agreed with the Ninth Circuit and reiterated the position it established in Dirks. The Court stated that Dirks is clear—a breach of fiduciary duty occurs when a tipper discloses information for a personal benefit and a personal benefit may be inferred where confidential information is gifted to a “trading relative or friend.” According to the Court, Mr. Maher disclosed MNPI to Mr. Kara with the expectation that he would trade on it, and Mr. Kara shared the information with Mr. Salman, who knew that the information had been improperly disclosed. Mr. Salman assumed Mr. Maher’s fiduciary duties and breached those duties when he traded on the information. The Court rejected the Newman test in holding that the government need not show that tippers received a concrete benefit for their tips if they are giving information to a relative or friend. “Making a gift of inside information to a relative . . . is little different from trading on the information, obtaining the profits and doling them out to the trading relative. The tipper benefits either way,” stated Justice Alito.

Clearly, the Salman holding will lower the evidentiary burden on the Government to prosecute insider trading cases involving friends or relatives. With this in mind, corporate compliance personnel should re-emphasize to insiders that they must remain vigilant in safeguarding MNPI in their communications with friends and family members.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 344
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Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

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Michael J. Diver, Securities Litigation Legal Specialist, Katten Muchin
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Michael J. Diver is the head of Katten's Chicago Securities Litigation and Enforcement practice. He represents public companies, financial services firms and other regulated entities, as well as their individual officers and directors, in matters before the Securities and Exchange Commission (SEC) and other regulatory bodies. A former Branch Chief in the Division of Enforcement of the SEC's Chicago Regional Office, Diver's experience covers virtually all areas of capital markets regulatory enforcement, including matters related to securitization and other...

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Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
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Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

Shown below is a...

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Nicole A. Saleem, Complex civil litigation, Financial Services, Katten Law Firm

Nicole A. Saleem concentrates her practice on complex civil litigation, enforcement actions, administrative proceedings and government investigations with a focus on the financial services industry. She has represented broker dealers, investment advisers, and officers and executives in connection with investigations by various federal and state authorities, including the Securities and Exchange Commission (SEC) and New York Attorney General (NYAG).

During law school, Nicole was a member of the Iowa Law Review and served as an executive...

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