December 08, 2016

Supreme Court Alert: Insider Trading

Salman v. United States (8-0 Opinion by Justice Alito on December 6, 2016.)

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.

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.

In Dirks v. SEC, 463 U. S. 646, SCOTUS explained that 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. The Court also held that a personal benefit 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.” Id., at 664.

SCOTUS has affirmed the Ninth Circuit’s holding that a jury can infer that the tipper personally benefited from making a gift of confidential information to a trading relative. Pp. 6–12. (a), noting that “when an insider makes a gift of confidential information to a trading relative or friend . . . [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient,” 463 U. S., at 664.

SCOTUS observed that, 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 Citigroup and its clients—a duty acquired and breached by Salman when he traded on the information with full knowledge that it had been improperly disclosed. The Court added that to the extent that the Second Circuit in Newman held that the tipper must also receive something of a “pecuniary or similarly valuable nature” in exchange for a gift to a trading relative, that rule is inconsistent with Dirks. Pp. 8–10.  Thus, the tipper need not receive anything of pecuniary value for criminal liability to attach.

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