Bassam Salman, a Chicago grocery wholesaler, received stock tips from a friend, who had in turn received inside information from Salman’s brother-in-law, an investment banker at Citigroup. Salman made hundreds of thousands of dollars from the tips, but he was also charged with insider trading and sentenced to three years in prison. Today the Supreme Court upheld Salman’s conviction, rejecting his argument that he could not be held liable because his brother-in-law had not received any financial benefits in exchange for the inside information that he disclosed. The unanimous ruling – which came just over two months after the oral argument – was a big victory for the federal government, which had warned the justices that a ruling for Salman would lead to even more disclosures of confidential information by corporate insiders.
In a 1983 case, Dirks v. SEC, the Supreme Court ruled that a “tippee” – someone who receives confidential information from an insider and then uses the information to trade – can be held liable under insider trading laws when the insider violates his duty to shareholders by disclosing the information, which in turn depends on whether the insider receives “a direct or indirect personal benefit from the disclosure.” The court in that case noted that jurors could infer a “personal benefit” when the insider either receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.”
In Salman’s case, the U.S. Court of Appeals for the 9th Circuit ruled that, following Dirks, the jury that convicted Salman could infer that Salman’s brother-in-law, Maher Kara, had breached his duty when he passed confidential information to his brother Michael, who then relayed it to Salman. In fact, the lower court ruled, Maher’s disclosures to Michael were “precisely the gift of confidential information to a trading relative that Dirks envisioned.”
The 9th Circuit’s application of Dirks to Salman’s case, the justices held today, was proper, although the justices took care to make clear that the issue presented by this specific case was a “narrow” one. Dirks, the court explained in an opinion by Justice Samuel Alito, “makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative.’” This is so, the court continued, because “giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” Here, the court reasoned, Maher Kara breached his duty of trust and confidence to Citigroup when he gave information to his brother, Michael, knowing that Michael would trade on it; Salman then inherited that duty and breached it when he traded on the confidential information.
The court rebuffed Salman’s contention, based on a recent decision by the U.S. Court of Appeals for the 2nd Circuit, that the insider must “also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift” of confidential information to family or friends. Such a requirement, the court emphasized, is “inconsistent with Dirks.” The court acknowledged that “many insider-trading cases” “involved insiders who personally profited through the misuse of trading information.” But the court seemed to attribute that fact to happenstance; it does not, the court stressed, change the test that the court “articulated and applied” in Dirks.
The court also agreed with Salman that, at least in some cases, it may be hard to determine whether an insider received a “personal benefit” from disclosing confidential information. But those hypothetical difficulties, the court emphasized, do not necessarily make the insider-trading laws so ambiguous that they violate the Constitution and require the court to overturn Salman’s conviction. Although the court left open the possibility that it might need to address that “difficult” scenario in a future case, it saw no need to do so here, because Salman’s conduct falls within the “heartland” of the conduct envisioned by Dirks.
Today’s ruling means that Salman’s conviction will stand. To a certain extent, the unanimous opinion’s relative brevity – just 12 pages – and the speed with which the eight-member court issued its decision belie the significance of the ruling. By rejecting the Second Circuit’s “pecuniary gain” requirement and making clear that conduct like Salman’s falls squarely within the insider-trading laws, the court took an important step in its first ruling in an insider-trading case in two decades.