The Latest Supreme Court Rulings on Insider Trading

Why the complicated case of a grocer takinga gift & going to prison matters

Introduction

The Supreme Court recently decided Salman v. US, a major insider trading case against a grocer who cashed in on tips of inside information, but who wound up holding the bag when members of his extended family of tippers pleaded out.

Insider Trading & Tipping

Insider Trading Vocabulary

● Insider Trading: Trading securities while in possession of inside information

● Inside Information: Material, nonpublic information that’s illegal to disclose or trade on

● Fiduciary Duty: In insider trading context, duty not to disclose or trade on inside information

Tipping Inside Information

Just as it’s illegal to trade on inside information, it’s also illegal to tip others or trade while in possession of the info.

● Tipper: someone who illegally tips inside information● Tippee: someone who receives a tip of inside

information and trades on it

Cases Covered

Salman v. US, 136 S. Ct. 899 (2016)US v. Salman, 792 F. 3d 1087 (9th Cir. 2015)US v. Newman, 773 F. 3d 438 (2nd Cir. 2014), cert. denied, 136 S. Ct. 242 ( 2015)Dirks v. SEC, 463 US 646 (1983)

Salman v. US

Overview of Salman v. US

● On 12/6/16, Supreme Court upheld grocer’s conviction for insider trading based on tips from member of extended family. Salman v. US

● The grocer, Bassam Salman, had argued that the person who tipped did not gain financially, so Salman should not be convicted

Holding of Salman v. US

Supreme Court held that Salman’s close relationship with the tipper meant there was no need to prove financial gain

Facts of Salman v. US

|→ Citigroup investment banker tipped older brother

|→ Older brother tipped sister-in-law’s brother, Salman

|→ Salman traded on tip

|→ Salman made $$K

Charges in Salman v. US

● DOJ brought insider trading/tipping charges● Brothers plea bargained, fingered Salman● Salman convicted of insider trading● Facing $730K and 3 years in prison, Salman appealed to US

Court of Appeals for the 9th Circuit

Meanwhile . . .

● 2nd Circuit decided that tipper must gain financially for tippees to be liable. US v. Newman

● Salman argued that Newman applied to him (no financial gain by tipper)

● 9th Circuit disagreed, upheld Salman’s criminal conviction

Escalating the issue

● Salman petitioned Supreme Court for Cert.● Government requested, but Supreme Court denied, Cert.

(judicial review) to Newman● Supreme Court’s denial of Cert. to Newman looked good for

Salman

Here’s why . . .

Newman looked good because . . .

Denial of Cert. to Newman seemed to mean Supreme Court agreed with holding that the tippees were not guilty of insider trading when:

● Tippees were not close to tippers (didn’t even know them)● Tippers didn’t gain financially

Newman looked good because . . .

Denial of Cert. to Newman seemed to mean Supreme Court agreed with holding that the tippees were not guilty of insider trading when:

● Tippees were not close to tippers (didn’t even know them)● Tippers didn’t gain financially

Newman looked good because . . .

Denial of Cert. to Newman seemed to mean Supreme Court agreed with holding that the tippees were not guilty of insider trading when:

● Tippees were not close to tippers (didn’t even know them)● Tippers did not gain financially

Newman looked good because . . .

In Salman’s case:

● Even though tippees were not close to tippers (didn’t even know knew them well)

● Tippers did not gain financially

Supreme Court had other ideas

Supreme Court disagreed with Newman for saying that tipper must gain financially to prove the tippee was guilty

Instead, Supreme Court relied on precedent that says tippee who participates in tipper’s breach of fiduciary duty for personal gain is liable (Dirks v. SEC)

Personal gain includes gifts

Holding: “personal gain” can include a gift of a tip to a close trading relative (close family or friend)

Giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.

-- US SUPREME COURT

Salman’s Fate

Salman’s conviction upheld because:

● He knew that the inside info originated from a breach of tipper’s fiduciary duty

● He participated in tipper’s breach of fiduciary duty by trading on inside info

● Tipper gained personally by his gift to trading relative

Salman Summarized

● Tipping means tipper gains personal benefit for disclosing inside information in breach of fiduciary duty

● Personal benefit includes gift of inside information to close family or friends

● Family or friends participate in crime by trading based on gift, knowing tipper’s breach of duty

● Both tipper and tippee culpable

Why it Matters

Legal Consequences

● Prosecutors (SEC & DOJ) now can prosecute gifts of inside information even if no monetary gain

● Court did not say whether rule applies to tippees other than “close” family and friends who know tipper breached duty○ How “close” do tippees need to be to tipper?○ Could a gift to a stranger be included?○ Ask SEC & DOJ

Poll Question #1

Are you surprised with the outcome of Salman?

Practical Consequences

● Insider trading hurts investors and markets, is a conflict of interest even if not clearly illegal -- need to know red flags

● Effective compliance programs essential in face of legal uncertainty (like twists and turns of this case)

Compliance Considerations

● Reading headlines about insider trading not enough● General knowledge, or general policy statements, although

crucial, are not enough● Hard to predict how the law will apply to particular situations

(rejection of Cert. to Newman did not look so good for Salman after all)

Poll Question #2

Are you concerned about the SEC/DOJ future interpretation of this ruling?

SidebarOlder Insider Trading course

→ no interactive scenario involving tipping & personal gain

Denial of Cert. to Newman affected compliance training

SidebarOlder Insider Trading course

→ no interactive scenarios involving tipping & personal gain

Newer Insider Trading course → → added interactive scenario involving monetary gain by tipper

Denial of Cert. to Newman affected compliance training

SidebarOlder Insider Trading course

→ no interactive scenarios involving tipping & personal gain

Newer Insider Trading course → → added interactive scenario involving monetary gain by tipper

Salman affected compliance training

SidebarOlder Insider Trading course

→ no interactive scenarios involving tipping & personal gain

Newer Insider Trading course → → added interactive scenario involving monetary gain by tipper

→ added interactive scenario involving gifting by tipper

Salman affected compliance training

Compliance Problems

Salman & related cases illustrate nuanced situations where the law would apply differently depending on the facts

A compliance program that does not effectively communicate this, or fails to give employees practical examples (better yet, practice) dealing with gray areas, does everyone a disservice

Compliance Solutions

Interactive training, vetted and put together by legal and instructional experts, helps employees negotiate nuanced situations they may encounter every day.

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For additional discussion, please see:● Tips as Gifts: Insider Trading Liability for Family & Friends After Salman● Cui Bono? Tippee Liability for Insider Trading after Newman, pending Salman

Poll Question #3

Do you feel your current insider trading training effectively addresses the risk of insider trading?

Questions ???

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