Happy Anniversary Newman – Part III


Another situation that may arise between the tipper and original tippee is one where the tippee is a relative or significant other of the tipper. In such a scenario, the Securities and Exchange Commission (SEC) seems to be pushing the limits of the personal benefit test and suggesting that under Dirks an exchange of information in a relationship of that nature is a gift in and of itself.

U.S. v. Salman – decided July 6, 2015

In Salman the SEC presented direct evidence that the disclosure of material information was intended as a gift of market-sensitive information.  U.S. v. Salman, 791 F.3d 1087, 1094 (9th Cir. 2015). Based on this evidence and Supreme Court guidance, the court held that Maher Kara (tipper), an employee in Citigroup’s healthcare investment group, incurred a personal benefit, when he disclosed confidential information to his brother, Michael Kara (tippee), knowing that he intended to trade on it, because this was a “gift of confidential information to a trading relative that Dirks envisioned.” Salman, 791 F.3d at 1092.  Even Mahar testified that by providing Michael with inside information, he intended to “benefit” his brother and to “fulfill whatever needs he had.” Id.

The court convicted Yacoub Salman (remote-tippee), Maher’s brother-in-law, of insider trading because Michael would relay the inside information to him.  Provided the close relationship of the Kara and Salman family and especially the Kara brothers, the court reasoned that Salman “could readily have inferred Maher’s intent to benefit Michael.” Id.  In discussing Salman’s argument that Maher did not receive any personal benefit by giving his brother material information, the court explained that if it were to adopt that rationale, “then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.”  Id. at 1094.  In sum, the Ninth Circuit further clarified that in context of a close or familial relationship, providing insider information may be considered a gift to the tippee and therefore constitute a personal benefit to the tipper.

SEC v. Spivak and Doddi – filed Nov. 2, 2015

Most recently, in SEC v. Doddi, the SEC alleged that “[a]lthough Doddi did not trade on the information, in tipping Spivak, her former significant other, she conferred a gift upon a romantic partner.” (Compl. ¶ 36). The SEC alleges that Doddi, a financial analyst at Wells Fargo, tipped her romantic partner, Spivak, with material, nonpublic information about American Dental Partners, Inc. (“ADPI”) being acquired by JLL Partners, Inc. that she learned during her employment. (Compl. ¶ 2).  Based on this information, Spivak purchased ADPI stock through his and his mother’s brokerage accountants, leading to a profit of $222,357, after he sold the shares following a public announcement of the acquisition.  (Compl. ¶ 5).  The matter has yet to be decided but considering that there is no remote-tippee involved, the direct exchange of information and resulting trading may strengthen the SEC’s argument that a personal benefit was exchanged and known by both parties to the exchange.

The take-away

The definition of “personal benefit” is very fact specific but in matters involving remote-tippee liability, as was the case in Newman, the SEC has to demonstrate either that the relationship is so close (familial or otherwise) that the supplying of material nonpublic information to the tippee was a gift or alternatively, that the history of the relationship evidences that the exchange of material nonpublic information was part of a quid pro quo relationship.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s