Attorney At Law Magazine – Minnesota Edition
Author: Steven C. Kerbaugh
In December 2016, the United States Supreme Court decided an important issue affecting when individuals may be liable for securities fraud.
The issue was whether an insider’s “gift” of confidential information to a relative is enough to establish fraud, even though the insider receives no pecuniary benefit in return. In Salman v. United States, 137 S.Ct. 420 (2016), the Court responded in the affirmative, effectively making it easier to establish insider trading liability.
THE LEGAL BACKDROP
Section 10(b) of the Securities Exchange Act prohibits undisclosed trading on inside corporate information by persons with duties of trust and confidence. Similarly, such insiders may not “tip” inside information to others for trading. A person receiving such information acquires a duty to refrain from trading on it if he/she knows that it was disclosed in breach of the tipper’s duty. A tippee’s violation of that duty may lead to liability for securities fraud.
In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court held that a tippee’s liability hinges on whether the tipper breached his/ her fiduciary duty in disclosing inside information. The Court noted that a tipper breaches his/her duty in disclosing inside information for “personal benefit,” which can be inferred where the tipper (a) receives something of value in exchange for the tip, or (b) “makes a gift of confidential information to a trading relative or friend.” Id. at 664.
SALMAN’S CONVICTION AND APPEAL
Maher Kara, an investment banker at Citigroup, provided inside information to his brother, Mounir “Michael” Kara, to “help him” meet his needs, and with the expectation that Michael would trade on it. Michael, in turn, provided inside information to Bassam Salman. Salman made over $1.5 million in profits trading on the information.
Investigative authorities ultimately caught on to Salman’s trading activities. Maher and Michael both pleaded guilty to securities fraud and cooperated with the government. Salman, on the other hand, was indicted for securities fraud and convicted. Salman then appealed.