Salman v. United States

137 S. Ct. 420 (2016)



In Dirks v. SEC, the United States Supreme Court explained that a tippee’s liability for trading on inside information hinges 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. And, the Court went on to say, a jury can infer a personal benefit—and thus a breach of the tipper’s duty—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.


Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5 prohibit undisclosed trading on inside corporate information by persons bound by a duty of trust and confidence not to exploit that information for their personal advantage. These persons are also forbidden from tipping inside information to others for trading. A tippee who receives such information with the knowledge that its disclosure breached the tipper's duty acquires that duty and may be liable for securities fraud for any undisclosed trading on the information. Petitioner Salman was indicted for federal securities-fraud crimes for trading on inside information he received from a friend and relative-by-marriage, Michael Kara, who, in turn, received the information from his brother, Maher Kara, a former investment banker at Citigroup. Maher testified at Salman's trial that he shared inside information with his brother Michael to benefit him and expected him to trade on it, and Michael testified to sharing that information with Salman, who knew that it was from Maher. Salman was convicted. While Salman's appeal to the Ninth Circuit was pending, the Second Circuit decided that  the case of Dirks v. SEC does not permit a factfinder to infer a personal benefit to the tipper from a gift   of confidential information to a trading relative or friend, unless there is  ''proof of a meaningfully close personal relationship'' between tipper and tippee ''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. The Ninth Circuit declined to follow Newman so far, holding that Dirks allowed Salman's jury to infer that the tipper breached a duty because he made '''a gift of confidential information to a trading relative.''' 


Did the Ninth Circuit properly apply the findings in Dirks, to affirm Salman's conviction?




Evidence that an investment banker who dealt with confidential information about mergers and acquisitions involving his employer gave confidential information to his brother, who gave it to the banker's brother-in-law (''defendant''), who used it to make trades, was sufficient to sustain defendant's convictions for conspiracy to commit securities fraud, in violation of 18 U.S.C.S. § 371, and securities fraud, in violation of 15 U.S.C.S. § 78j(b). In Dirks v. SEC, the United States Supreme Court explained that 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. The test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Thus, the disclosure of confidential information without personal benefit is not enough. In determining whether a tipper derived a personal benefit, the Supreme Court instructed courts to focus on objective criteria, i.e., whether an insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. This personal benefit can often be inferred from objective facts and circumstances, such as a relationship between an insider and a recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. In particular, the Court held that the 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, the tip and trade resemble trading by the insider followed by a gift of the profits to the recipient.

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