U.S. Supreme Court Holds No Pecuniary Benefit Necessary for Criminal Liability for Insider Trading
Today, the U.S. Supreme Court upheld the conviction of Balman, a Chicago grocery wholesaler, who received stock tips from a friend, who had received the inside information from Salman’s brother-in-law, an investment banker at Citigroup. The issue before the Supreme Court was whether Salmon, the tippee, could be held criminally liable where the “tipper” did not receive any financial benefits in exchange for the inside information that he disclosed. The Supreme Court answered in the affirmative, finding that nor financial benefit is necessary.
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, the 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.
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 9th Circuit Court of Appeals held that, following Dirks, the jury correctly found that Salman’s brother-in-law, Maher Kara, had breached his fiduciary duty when he tipped his brother Michael, who gave the information to Salman. The Supreme Court rejected a recent 2d Circuit decision which held that the insider must receive something of pecuniary value for the tip.