On December 6, the U.S. Supreme Court issued a unanimous decision, penned by Justice Samuel Alito, in the case of Salman v. United States. The decision clarifies that a quid pro quo relationship is not required between a tipper and tippee, where insider information is exchanged between parties in a close relationship and the tipper is providing the information to the tippee as a gift.
Bassam Yacoub Salman was convicted as a tippee who traded on inside information from his brother-in-law, Maher Kara, who was an investment banker at Citigroup. Salman, however, did not receive the information directly from Kara; rather, Kara provided the insider information to his brother, Michael Kara, who in turn shared the information with Salman. The evidence presented at trial established that Salman knew that the information was coming from Maher Kara and that Maher Kara breached a fiduciary duty by providing the information to Michael Kara. Nevertheless, following his conviction, Salman appealed, arguing—largely on the basis of the Second Circuit's decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, 136 S. Ct. 242 (2015)—that Maher Kara did not receive "anything of a pecuniary or similarly valuable nature in exchange" for the insider information Maher Kara provided to Michael Kara. The Ninth Circuit disagreed with Salman and affirmed his conviction. The Court granted certiorari to resolve the apparent circuit split.
The Salman Decision and Continued Applicability of Newman
The Court's holding in Salman is neither new nor complex, but nevertheless is extremely important because of its limitation of Newman. In affirming its decision in Dirks v. SEC, 463 U.S. 646 (1983), the 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." To determine whether the requisite breach occurred, the inquiry focuses "in large part on the purpose of the disclosure." Because the "'test . . . is whether the insider personally will benefit, directly or indirectly, from his disclosure[,]'" the Court held that "the disclosure of confidential information without personal benefit is not enough."
The Second Circuit's decision in Newman apparently seized on that last part insofar as it held that "the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends." But the Salman Court rejected this requirement—though not the entirety of the Newman decision—holding 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." Stated differently, in circumstances where a familial relationship or friendship exists, a quid pro quo arrangement is not required to prove insider trading.
The Salman decision is by no means a wholesale rejection of Newman; those who incorrectly suggest that it is forget that the Court denied certiorari in that case just last year. Still, Salman marks a clear precedent by a unanimous Court that individuals with fiduciary duties must be vigilant in ensuring that nonpublic material information is not shared or traded on. Individuals who breach that duty face significant risk, along with a potentially reinvigorated prosecutorial team who may now pursue cases that seemed unwinnable under the now-rejected Newman standard.
The above discussion demonstrates that an individual or company should consult experienced counsel prior to trading decisions, and especially if they become subject to an investigation by the SEC or any other government agency. Among other things, counsel can evaluate whether any potential violations of securities laws may occur or have occurred and help devise a strategy to mitigate, to the extent possible, any potential or pending civil or criminal exposure. In addition, companies should consider providing regular trainings on developments in securities law, particularly the laws relating to insider trading, to ensure that their employees are operating within the bounds of the law. Such trainings are not only a valuable service to the employees but also evidence, should it ever become necessary, of a company's desire to abide by the rules in the event that a violation occurs.