by Cydney Posner
In a case decided unanimously today, Salman v. United States, SCOTUS upheld the Ninth Circuit affirmation of Bassam Salman’s conviction for insider trading, “adher[ing] to Dirks, which easily resolves the narrow issue presented here.”
In this case, Salman received valuable trading tips from a friend and extended family member (Michael), who had received the information from Maher, an M&A healthcare investment banker who was Michael’s brother and Salman’s brother-in-law. Salman then traded on the information, ultimately realizing over $1.5 million. During the trial, Maher, who had pleaded guilty, testified that “he shared inside information with his brother to benefit him and with the expectation that his brother would trade on it.” Michael, who had also pleaded guilty, “testified that he told Salman that the information was coming from Maher.” Salman was convicted of securities fraud and conspiracy to commit securities fraud, but appealed his case to the Ninth Circuit.
SideBar: Here’s a quote from the opinion about the facts of the case, which I found sadly enlightening in providing insight into how the corruption of insider trading crept into the lives of people who, I would guess, were probably not initially contemplating it: After Maher began his job at the bank,
“he began discussing aspects of his job with Michael. At first he relied on Michael’s chemistry background to help him grasp scientific concepts relevant to his new job. Then, while their father was battling cancer, the brothers discussed companies that dealt with innovative cancer treatment and pain management techniques. Michael began to trade on the information Maher shared with him. At first, Maher was unaware of his brother’s trading activity, but eventually he began to suspect that it was taking place.
“Ultimately, Maher began to assist Michael’s trading by sharing inside information with his brother about pending mergers and acquisitions. Maher sometimes used code words to communicate corporate information to his brother. Other times, he shared inside information about deals he was not working on in order to avoid detection…. Without his younger brother’s knowledge, Michael fed the information to others — including Salman, Michael’s friend and Maher’s brother-in-law.”
While Salman’s appeal was pending, the Second Circuit, in United States v. Newman, reversed two insider trading convictions, concluding that, while Dirks allows a personal benefit to be inferred from a gift of confidential information to a trading relative or friend, that inference “‘is impermissible in the absence of 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.’” (Notably, the court found that the traders were several steps removed from the insiders and also “found that ‘there was no evidence that either [of the traders] was aware of the source of the inside information.’”) Relying on Newman, Salman then contended on appeal that his conviction should be reversed, arguing that, because the tipper Maher did not receive money or property in exchange for the tips, he did not personally benefit from them, and thus Salman could not be held liable as a tippee. The Ninth Circuit disagreed, holding that, under Dirks, the jury could properly infer that the tipper Maher “breached a duty because he made a ‘gift of confidential information to a trading relative.’”
SCOTUS granted cert. to resolve the conflict between the circuits. Salman argued again, among other things, that the gift of inside information would not suffice as a “personal benefit” to establish insider trading “unless the tipper’s goal in disclosing inside information is to obtain money, property, or something of tangible value.” In contrast, the U.S. took the position that “a tipper personally benefits whenever the tipper discloses confidential trading information for a noncorporate purpose,” and, as result, “a gift of confidential information to anyone, not just a ‘trading relative or friend,’ is enough to prove securities fraud.” Neither of those positions was adopted by the Court.
As noted above, citing Dirks v. SEC, SCOTUS agreed with the Ninth Circuit. In Dirks, SCOTUS explained that liability for insider trading by a tippee depends on “whether the tipper breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, [the Court] held, when the tipper discloses the inside information for a personal benefit.” Further, the Court held, “‘[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.’…. In such cases, ‘[t]he tip and trade resemble trading by the insider followed by a gift of the profits to the recipient.’” Similarly, in Salman, the Court maintained that making “a gift of inside information to a relative like Michael is little different from trading on the information, obtaining the profits, and doling them out to the trading relative. The tipper benefits either way. The facts of this case illustrate the point: In one of their tipper-tippee interactions, Michael asked Maher for a favor, declined Maher’s offer of money, and instead requested and received lucrative trading information.”
As the Court reasoned:
“Our discussion of gift giving resolves this case. Maher, the tipper, provided inside information to a close relative, his brother Michael. Dirks makes clear that 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. As Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother…. It is obvious that Maher would personally benefit in that situation. But Maher effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it. Dirks appropriately prohibits that approach, as well…. Dirks specifies that when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds. Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to [the bank] and its clients—a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.”
Salman’s conduct, the Court concluded “is 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.’…. 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.’”
SideBar: Although SCOTUS disagreed with the Second Circuit’s interpretation of Dirks, which required that a personal benefit involve a “potential gain of a pecuniary or similarly valuable nature,” the Court noted that the Newman decision also relied on the absence of “evidence that the defendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips…. This case does not implicate those issues.”