On December 6, 2016, the United States Supreme Court (SCOTUS) issued its opinion in the much anticipated insider trading case, Salman v. United States, 580 U.S. ___ (2016). (See Happy Anniversay Newman – Part III for a summary on Salman). In a unanimous decision, SCOTUS upheld the conviction of remote-tippee, Bassam Yacoub Salman, for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, which prohibits 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. The crux of the decision revolved around the question of “personal benefit.” Previously, in Dirks v. SEC, 463 U.S. 646 (1983), SCOTUS had held that a tipper breaches his or her fiduciary duty when the tipper discloses information for a personal benefit. Salman appealed his conviction on the issue of personal benefit by contending that a gift of confidential information to a friend or family member alone is insufficient to establish the personal benefit required for tippee liability. SCOTUS rejected Salman’s argument.
Salman had traded on information received through his friend, Michael Kara, who had received confidential trading information from his brother, Maher Kara, an investment banker (hereinafter, referred to by first names to avoid confusion). The Court prescribed in Dirks that a personal benefit is illustrated where the tipper received something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” For Salman, the Court reasoned that the personal benefit was realized when Maher gave his brother, Michael, confidential trading information. It did not matter that the personal benefit was not exchanged between Maher, tipper, and Salman, a remote-tippee. The Court focused on the fact that the tipper, here, Maher, personally benefitted from the disclosure of information to his brother. In adhering to the guidance in Dirks, which established that a tippee is exposed to liability for trading on inside information if the tippee participates in a breach of the tipper’s fiduciary duty, Justice Samuel Alito writing for the Court, found that Salman exposed himself because he “traded on information with full knowledge that it had been improperly disclosed.” Salmon, 580 U.S. at *2.
SCOTUS “cleared up” the concept that a gift does not need to be tangible in evaluating the personal-benefit test, nor does there need to be a gift of any kind beyond the existence of the relationship where there is “proof of a meaningfully close personal relationship.” In Salman, the Court could easily hang its hat on the fact that Maher and Michael were brothers. Provided the exchange of information transpired through that relationship, one of family ties, a benefit was conferred upon the tipper. See Salmon, 580 U.S. at *9 (“Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to “a trading relative,” and that rule is sufficient to resolve the case at hand.”)
What SCOTUS left open, however, is a situation in which the tipper-tippee cannot be chalked up to that of familial nature or otherwise close ties. The extreme example of this gray area would be where an insider, like Maher, gave trading information to someone random, i.e. someone he just met at holiday happy hour (tis the season). Ignoring the question as to why a tipper would give such information away, if that random individual traded on that information, any court would be hard-pressed to find any personal benefit incurred by the tipper because there is no “meaningfully close relationship” nor is there a traditional gift of tangible value. Another gray area left open is where the tipper provides information to a family member or friend merely for education purposes or simply unintentionally, i.e. over small talk discussing “this is what I’m working on,” but the tipper has no expectation or intention that the family member or friend will trade on that confidential information or pass it along to others to trade on that confidential information; yet, the tippee or a remote tippee trades on that voluntary, confidential information. Again, there does not appear to be any clear-cut personal benefit in that factual scenario. It is in these gray instances where the relationship between the tipper-tippee is not clearly a family or friend exchange and the benefit is not easily recognizable, and as a result “assessing liability for gift-giving will be difficult.” Salmon, 580 U.S. at *11. Undoubtedly, in light of the opinion, in future insider trading cases, prosecutors will forge the existence of a meaningful relationship where no tangible gift is identified between the tipper and tippee (see, e.g., SEC v. Spivak, characterizing the tipper-tippee relationship as “romantic partners”) and in contrast, tippers or tippees will likely water down the significance any relationships. And so the predicament of non-traditional relationship labels, especially in the context of the personal benefit test, continues…