Bassam Salman, a Chicago grocery wholesaler, received
stock tips from a friend, who had in turn received inside information from
Salman’s brother-in-law, an investment banker at Citigroup. Salman made
hundreds of thousands of dollars from the tips, but he was also charged with
insider trading and sentenced to three years in prison. Today the Supreme Court
upheld Salman’s conviction, rejecting his argument that he could not be held
liable because his brother-in-law had not received any financial benefits in exchange
for the inside information that he disclosed. The unanimous ruling – which came just
over two months after the oral argument – was a big victory for the federal
government, which had warned the justices that a ruling for Salman would lead
to even more disclosures of confidential information by corporate insiders.
In a 1983 case, Dirks v. SEC, the Supreme Court ruled that a “tippee” – someone who receives
confidential information from an insider and then uses the information to trade
– can be held liable under insider trading laws when the insider violates his
duty to shareholders by disclosing the information, which in turn depends on
whether the insider receives “a direct or indirect personal benefit from the
disclosure.” The court in that case noted that jurors could infer a “personal
benefit” when the insider either receives something of value in exchange for
the tip or “makes a gift of confidential information to a trading relative or
friend.”
In Salman’s case, the
U.S. Court of Appeals for the 9th Circuit ruled that, following Dirks, the jury that convicted Salman could infer that
Salman’s brother-in-law, Maher Kara, had breached his duty when he passed
confidential information to his brother Michael, who then relayed it to Salman.
In fact, the lower court ruled, Maher’s disclosures to Michael were “precisely
the gift of confidential information to a trading relative that Dirks envisioned.”
The 9th Circuit’s
application of Dirks to Salman’s case, the justices held
today, was proper, although the justices took care to make clear that the issue
presented by this specific case was a “narrow” one. Dirks, the court explained in an opinion by Justice
Samuel Alito, “makes clear that a tipper breaches a fiduciary duty by making a
gift of confidential information to ‘a trading relative.’” This is so, the
court continued, because “giving a gift of trading information is the same
thing as trading by the tipper followed by a gift of the proceeds.” Here, the
court reasoned, Maher Kara breached his duty of trust and confidence to
Citigroup when he gave information to his brother, Michael, knowing that
Michael would trade on it; Salman then inherited that duty and breached it when
he traded on the confidential information.
The court rebuffed
Salman’s contention, based on a recent decision by the U.S. Court of Appeals
for the 2nd Circuit, that the insider must “also receive something of a
‘pecuniary or similarly valuable nature’ in exchange for a gift” of
confidential information to family or friends. Such a requirement, the court
emphasized, is “inconsistent with Dirks.” The court
acknowledged that “many insider-trading cases” “involved insiders who
personally profited through the misuse of trading information.” But the court
seemed to attribute that fact to happenstance; it does not, the court stressed,
change the test that the court “articulated and applied” in Dirks.
The court also agreed
with Salman that, at least in some cases, it may be hard to determine whether
an insider received a “personal benefit” from disclosing confidential
information. But those hypothetical difficulties, the court emphasized, do not
necessarily make the insider-trading laws so ambiguous that they violate the
Constitution and require the court to overturn Salman’s conviction. Although
the court left open the possibility that it might need to address that
“difficult” scenario in a future case, it saw no need to do so here, because
Salman’s conduct falls within the “heartland” of the conduct envisioned by Dirks.
Today’s ruling means
that Salman’s conviction will stand. To a certain extent, the unanimous
opinion’s relative brevity – just 12 pages – and the speed with which the
eight-member court issued its decision belie the significance of the ruling. By
rejecting the 2nd Circuit’s “pecuniary gain” requirement and making clear that
conduct like Salman’s falls squarely within the insider-trading laws, the court
took an important step in its first ruling in an insider-trading case in two
decades.
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