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, had received the information from his brother, Maher Kara, a former investment banker at Citigroup. Maher testified at Salman’s trial that he had shared inside information with his brother Michael to benefit him and expected him to trade on it. Michael testified to sharing that information with Salman, who knew that it was from Maher. Salman was convicted.
JUSTICE ALITO …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 individuals who are under a duty of trust and confidence that prohibits them from secretly using such information for their personal advantage.
These persons also may not tip inside information to others for trading. The tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty, and the tippee may commit securities fraud by trading in disregard of that knowledge. In Dirks v. SEC, this Court explained that a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit. And, we went on to say, a jury can infer a personal benefit—and thus a breach of the tipper’s duty—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.”…
…In this case, Salman contends that an insider’s “gift of confidential information to a trading relative or friend,” …is not enough to establish securities fraud.
Instead, Salman argues, a tipper does not personally benefit unless the tipper’s goal in disclosing inside information is to obtain money, property, or something of tangible value. He claims that our insider-trading precedents, and the cases those precedents cite, involve situations in which the insider exploited confidential information for the insider’s own “tangible monetary profit.”
…Our discussion of gift giving resolves this case. Maher, the tipper, provided inside information to a close relative, his brother Michael. Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to “a trading relative,” and that rule is sufficient to resolve the case at hand. As Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother…. It is obvious that Maher would personally benefit in that situation. But Maher effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it.
Dirks appropriately prohibits that approach, as well. (Holding that “insiders [are] forbidden” both “from personally using undisclosed corporate information to their advantage” and from “giv[ing] such information to an outsider for the same improper purpose of exploiting the information for their personal gain”). Dirks specifies that when a tipper gives inside information to “a trading relative or friend,” the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information 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 Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.
Salman points out that many insider-trading cases—including several that Dirks cited—involved insiders who personally profited through the misuse of trading information. But this observation does not undermine the test Dirks articulated and applied….
Salman’s jury was properly instructed that a personal benefit includes “the benefit one would obtain from simply making a gift of confidential information to a trading relative.” … As the Court of Appeals noted, “the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information.”… And, as Salman conceded below, this evidence is sufficient to sustain his conviction under our reading of Dirks….“Maher made a gift of confidential information to a trading relative [Michael]… and, if [Michael’s] testimony is accepted as true (as it must be for purposes of sufficiency review, Salman knew that Maher had made such a gift.”
Affirmed in favor of the Government.
CRITICAL THINKING:
How would you evaluate the court’s claim that giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds?
ETHICAL DECISION MAKING:
Which stakeholders benefit the most from the decision in this case?