Supreme Court Rules on USA v. Salman Insider Trading Case

On December 6, 2016, the United States Supreme Court issued a dramatic and historic ruling in the high-profile insider trading case of United States of America v. Bassam Yacoub Salman.  The Supreme Court's Opinion clarifies some of the uncertainty that developed following the United States Court of Appeals for the Second Circuit vacatur of the insider-trading convictions in United States of America v. Todd Newman and Anthony Chiasson. In affirming the Ninth Circuit, the Supreme Court wrestled with the question of whether a "personal benefit" bestowed upon an insider requires proof of a potential or actual pecuniary gain; or, as the Ninth Circuit found, that proof of a close family relationship between the insider and tippee is sufficient.

[I]n 2002, Salman's future brother-in-law Maher Kara joined Citigroup's healthcare investment banking group. Over the next few years, Maher began to discuss aspects of his job with his older brother, Mounir ("Michael") Kara. At first, Maher sought help from Michael, who held an undergraduate degree in chemistry, in understanding scientific concepts relevant to his work in the healthcare and biotechnology sectors. In 2004, when their father was dying of cancer, the focus of the brothers' discussions shifted to companies that were active in the areas of oncology and pain management. Maher began to suspect that Michael was trading on the information they discussed, although Michael initially denied it. As time wore on, Michael became more brazen and more persistent in his requests for inside information, and Maher knowingly obliged. From late 2004 through early 2007, Maher regularly disclosed to Michael information about upcoming mergers and acquisitions of and by Citigroup clients.

Meanwhile, in 2003, Maher Kara became engaged to Salman's sister, Saswan ("Suzie") Salman. Over the course of the engagement, the Kara family and the Salman family grew close. In particular, Salman and Michael Kara became fast friends. In the fall of 2004, Michael began to share with Salman the inside information that he had learned from Maher, encouraging Salman to "mirror-imag[e]" his trading activity. Rather than trade through his own brokerage account, however, Salman arranged to deposit money, via a series of transfers through other accounts, into a brokerage account held jointly in the name of his wife's sister and her husband, Karim Bayyouk. Salman then shared the inside information with Bayyouk and the two split the profits from Bayyouk's trading. The brokerage records introduced at trial revealed that, on numerous occasions from 2004 to 2007, Bayyouk and Michael Kara executed nearly identical trades in securities issued by Citigroup clients shortly before the announcement of major transactions. As a result of these trades, Salman and Bayyouk's account grew from $396,000 to approximately $2.1 million.

Of particular relevance here, the Government presented evidence that Salman knew full well that Maher Kara was the source of the information. Michael Kara (who pled guilty and testified for the Government) testified that, early in the scheme, Salman asked where the information was coming from, and Michael told him, directly, that it came from Maher. Michael further testified about an incident that occurred around the time of Maher and Suzie's wedding in 2005. According to Michael Kara, on that visit, Michael noticed that there were many papers relating to their stock trading strewn about Salman's office. Michael became angry and admonished Salman that he had to be careful with the information because it was coming from Maher. Michael testified that Salman agreed that they had to "protect" Maher and promised to shred all of the papers.

The Government further presented evidence that Maher and Michael Kara enjoyed a close and mutually beneficial relationship. Specifically, the jury heard testimony that Michael helped pay for Maher's college, that he stood in for their deceased father at Maher's wedding, and, as discussed above, that Michael coached Maher in basic science to help him succeed at his job. Maher, for his part, testified that he "love[d] [his] brother very much" and that he gave Michael the inside information in order to "benefit him" and to "fulfill[] whatever needs he had." For example, Maher testified that on one occasion, he received a call from Michael asking for a "favor," requesting "information," and explaining that he "owe[d] somebody." After Michael turned down Maher's offer of money, Maher gave him a tip about an upcoming acquisition instead.

Finally, the Government presented evidence that Salman was aware of the Kara brothers' close fraternal relationship. The Salmans and the Karas were tightly knit families, and Salman would have had ample opportunity to observe Michael and Maher's interactions at their regular family gatherings. For example, Michael gave a toast at Maher's wedding, which Salman attended, in which Michael described how he spoke to his younger brother nearly every day and described Maher as his "mentor," his "private counsel," and "one of the most generous human beings he knows." Maher, overcome with emotion, began to weep.

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the  Government must prove beyond a reasonable doubt that the tippee  knew that an insider disclosed confidential information and that he  did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which  defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal  benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson  knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.

In Salman's case, the jury had more than enough facts, as described above, to infer that when Maher Kara gave inside information to Michael Kara, he knew that there was a potential (indeed, a virtual certainty) that Michael would trade on it. And while Salman may not have been aware of all the details of the Kara brothers' relationship, the jury could easily have found that, as a close friend and member (through marriage) of the close-knit Kara clan, Salman must have known that, when Maher gave confidential information to Michael, he did so with the "intention to benefit" a close relative. Id.

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, this Court 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. 

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. Maher testified at Salman's trial that he shared inside information with his brother Michael to benefit him and expected him to trade on it, and Michael testified to sharing that information with Salman, who knew that it was from Maher. Salman was convicted. 

While Salman's appeal to the Ninth Circuit was pending, the Second Circuit decided that Dirks does not permit a fact-finder to infer a personal benefit to the tipper from a gift of confidential information to a trading relative or friend, unless there is "proof of a meaningfully close personal relationship" between tipper and tippee "that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," United States v. Newman, 773 F. 3d 438, 452, cert. denied, 577 U. S. ___. The Ninth Circuit declined to follow Newman so far, holding that Dirks allowed Salman's jury to infer that the tipper breached a duty because he made " ‘a gift of confidential information to a trading relative.' " 792 F. 3d 1087, 1092 (quoting Dirks, 463 U. S., at 664). 

Held: The Ninth Circuit properly applied Dirks to affirm Salman's conviction. Under Dirks, the jury could infer that the tipper here personally benefited from making a gift of confidential information to a trading relative. Pp. 6-12. 

(a) Salman contends that a gift of confidential information to a friend or family member alone is insufficient to establish the personal benefit required for tippee liability, claiming that a tipper does not personally benefit unless the tipper's goal in disclosing information is to obtain money, property, or something of tangible value. The Government counters that a gift of confidential information to anyone, not just a "trading relative or friend," is enough to prove securities fraud because a tipper personally benefits through any disclosure of confidential trading information for a personal (non-corporate) purpose. The Government argues that any concerns raised by permitting such an inference are significantly alleviated by other statutory elements prosecutors must satisfy. Pp. 6-8. 

(b) This Court adheres to the holding in Dirks, which easily resolves the case at hand: "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. In these situations, the tipper personally benefits because giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds. Here, 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. 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. 

(c) Salman's arguments to the contrary are rejected. Salman has cited nothing in this Court's precedents that undermines the gift-giving principle this Court announced in Dirks. Nor has he demonstrated that either §10(b) itself or Dirks's gift-giving standard "leav[e] grave uncertainty about how to estimate the risk posed by a crime" or are plagued by "hopeless indeterminacy." Johnson v. United States, 576 U. S. ___, ___, ___. Salman also has shown "no grievous ambiguity or uncertainty that would trigger" the rule of lenity. Barber v. Thomas, 560 U. S. 474, 492 (internal quotation marks omitted). To the contrary, his conduct is in the heartland of Dirks's rule concerning gifts of confidential information to trading relatives. Pp. 10-12. 

• Insider Trading
• Salman
• Newman
• Chiasson
• Pecuniary Gain
• 9th Circuit
• Family Relationship
• Tipper
• Tippee
• Insider