U.S. v. Salman

792 F.3d 1087 (9th Cir. 2015) cert. granted, 136 S.Ct. 899 (2016).

My Brother—The Keeper of Inside Information

FACTS

In 2002, Maher Kara joined Citigroup’s health care investment banking group. Over the next few years, Maher began to discuss aspects of his job with his older brother, Mounir (“Michael”) Kara. Maher began to suspect that Michael was trading on the information they discussed, although Michael initially denied it. As time wore on, Michael became more brazen and more persistent in his requests for inside information, and Maher knowingly obliged. From late 2004 through early 2007, Maher regularly disclosed to Michael information about upcoming mergers and acquisitions of and by Citigroup clients.

In 2003, Maher Kara became engaged to Salman’s sister, Saswan (“Suzie”) Salman. Salman and Michael Kara became fast friends. In the fall of 2004, Michael began to share with Salman the inside information that he had learned from Maher, encouraging Salman to “mirror-imag[e]” his trading activity. Rather than trade through his own brokerage account, however, Salman arranged to deposit money, via a series of transfers through other accounts, into a brokerage account held jointly in the name of his wife’s sister and her husband, Karim Bayyouk. Salman then shared the inside information with Bayyouk, and the two split the profits from Bayyouk’s trading. From 2004 to 2007, Bayyouk and Michael Kara executed nearly identical trades in securities issued by Citigroup clients shortly before the announcement of major transactions. As a result of these trades, Salman and Bayyouk’s account grew from $396,000 to approximately $2.1 million.

The government presented evidence that Salman knew full well that Maher Kara was the source of the information. Michael Kara (who pled guilty and testified for the government) testified that, early in the scheme, Salman asked where the information was coming from, and Michael told him, directly, that it came from Maher. Michael further testified about an incident that occurred around the time of Maher and Suzie’s wedding in 2005. According to Michael Kara, on that visit, Michael noticed that there were many papers relating to their stock trading strewn about Salman’s office. Michael became angry and admonished Salman that he had to be careful with the information because it was coming from Maher. Michael testified that Salman agreed that they had to “protect” Maher and promised to shred all of the papers.

Maher and Michael Kara enjoyed a close and mutually beneficial relationship. Michael helped pay for Maher’s college. Maher, for his part, testified that he “love[d] [his] brother very much” and that he gave Michael the inside information in order to “benefit him” and to “fulfill [ ] whatever needs he had.” For example, Maher testified that on one occasion, he received a call from Michael asking for a “favor,” requesting “information,” and explaining that he “owe[d] somebody.” After Michael turned down Maher’s offer of money, Maher gave him a tip about an upcoming acquisition instead.

Michael gave a toast at Maher’s wedding, which Salman attended, in which Michael described how he spoke to his younger brother nearly every day and described Maher as his “mentor,” his “private counsel,” and “one of the most generous human beings he knows.” Maher, overcome with emotion, began to weep.

The jury found Salman guilty on all five counts of insider trading. Salman appealed.

JUDICIAL OPINION

RAKOFF, Senior District Judge

Salman urges us to adopt U.S. v. Newman, 773 F.3d438 (2nd Cir. 2014), cert. denied, 136 S.Ct. 242 (2015) as the law of this Circuit, and contends that, under Newman, the evidence was insufficient to find either that Maher Kara disclosed the information to Michael Kara in exchange for a personal benefit, or, if he did, that Salman knew of such benefit.

The “personal benefit” requirement for tippee liability derives from the Supreme Court’s opinion in Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). Dirks presented an unusual fact pattern. Ronald Secrist, a whistleblower at a company called Equity Funding, had contacted Raymond Dirks, a well-known securities analyst, after Secrist’s prior disclosures to the Securities and Exchange Commission (“SEC”) had gone for naught. Secrist, for no other purpose than exposing the Equity Funding fraud, disclosed inside information about the company to Dirks, who in turn launched his own investigation that eventually led to public exposure of a massive fraud. However, in the process of his investigation, Dirks openly discussed the information provided by Secrist with various clients and investors, some of whom then sold their Equity Funding stock on the basis of that information. Upon learning this, the SEC charged Dirks with securities fraud, and this position was upheld by an SEC Administrative Law Judge and affirmed by the District of Columbia Circuit, after which certiorari was granted.

When the case came to the Supreme Court, the Court, began by noting that, whistleblowing quite aside, corporate insiders, in the many conversations they typically have with stock analysts, often accidentally or mistakenly disclose material information that is not immediately available to the public. Thus, “[i] mposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.” At the same time, the Court continued, “[t]he need for a ban on some tippee trading is clear. Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain.”

“Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure,” for in that case the insider is breaching his fiduciary duty to the company’s shareholders not to exploit company information for his personal benefit. And a tippee is equally liable if “the tippee knows or should know that there has been [such] a breach,” i.e., knows of the personal benefit.

The last-quoted holding of Dirks governs this case. Maher’s disclosure of confidential information to Michael, knowing that he intended to trade on it, was precisely the “gift of confidential information to a trading relative” that Dirks envisioned. Indeed, Maher himself testified that, by providing Michael with inside information, he intended to “benefit” his brother and to “fulfill[ ] whatever needs he had.” As to Salman’s knowledge, Michael Kara … testified that he directly told Salman that it was Michael’s brother Maher who was, repeatedly, leaking the inside information that Michael then conveyed to Salman. Given the Kara brothers’ close relationship, Salman could readily have inferred Maher’s intent to benefit Michael. Thus, there can be no question that, under Dirks, the evidence was sufficient for the jury to find that Maher disclosed the information in breach of his fiduciary duties and that Salman knew as much.

Salman argues that the Second Circuit in Newman interpreted Dirks to require more than this. Of course, Newman is not binding on us… . But we would not lightly ignore the most recent ruling of our sister circuit in an area of law that it has frequently encountered.

The defendants in Newman, Todd Newman and Anthony Chiasson, both portfolio managers, were charged with trading on material non-public information regarding two companies, Dell and NVIDIA, obtained by a group of analysts at various hedge funds and investment firms. The information came to them via two distinct tipping chains. The Dell tipping chain originated with Rob Ray, a member of Dell’s investor relations department. Ray tipped information regarding Dell’s earnings numbers to Sandy Goyal, an analyst. Goyal, in turn, relayed the information to Jesse Tortora, another analyst, who relayed it to his manager, Newman, as well as to other analysts including Spyridon Adondakis, who passed it to Chiasson. Id. The NVIDIA tipping chain began with Chris Choi, of NVIDIA’s finance unit, who tipped inside information to his acquaintance Hyung Lim, who passed it to Danny Kuo, an analyst, who circulated it to his analyst friends, including Tortora and Adondakis, who in turn gave it to Newman and Chiasson. Having received this information, Newman and Chiasson executed trades in both Dell and NVIDIA stock, generating lavish profits for their respective funds.

The Second Circuit held that this evidence was insufficient to establish that either Ray or Choi received a personal benefit in exchange for the tip. It noted that, although the “personal benefit” standard is “permissive,” it “does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.” Instead, to the extent that “a personal benefit may be inferred from a personal relationship between the tipper and tippee, … such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

Salman reads Newman to hold that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit. In particular, he focuses on the language indicating that the exchange of information must include “at least a potential gain of a pecuniary or similarly valuable nature,” which he reads as referring to the benefit received by the tipper. Salman argues that because there is no evidence that Maher received any such tangible benefit in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden.

To the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an “insider makes a gift of confidential information to a trading relative or friend.”

In our case, the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information. Specifically, Maher Kara testified that he disclosed the material nonpublic information for the purpose of benefitting and providing for his brother Michael. Thus, the evidence that Maher Kara breached his fiduciary duties could not have been more clear, and the fact that the disclosed information was market-sensitive—and therefore within the reach of the securities laws. If Salman’s theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return. Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.

[W]e find that the evidence was more than sufficient for a rational jury to find both that the inside information was disclosed in breach of a fiduciary duty, and that Salman knew of that breach at the time he traded on it.

Affirmed.

What should those who have inside information learn from this decision?