In the Courts

Bassam Salman (“Salman”) was convicted of insider trading and conspiracy after he received information from a friend, who had in turn gained the information from Salman's brother-in-law, a Citigroup investment banker. Salman used this information to earn over $1.5 million. Salman was sentenced to three years in prison, three years' supervised release, and $730,000 in restitution. In appealing his conviction, Salman asserted that he could not be liable as the tippee because his brother-in-law (the tipper) did not personally benefit from disclosing the inside information to his brother. The U.S. Court of Appeals for the Ninth Circuit upheld Salman's conviction based on the reasoning set forth in Dirks that Salman's brother-in-law breached the duty when he made a “gift of confidential information” to Salman.

The Ninth Circuit previously rejected the reasoning set forth by the U.S. Court of Appeals for the Second Circuit in United States v. Newman, 773 F.3d 438 (2014), a case decided while Salman's conviction was on appeal, and upon which Salman relied. In Newman, the Second Circuit held that “there was no evidence that [the defendants were] aware of the source of the inside information” because there were “several steps removed from the corporate insiders.” The Second Circuit reasoned that “without establishing the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach.”

The Second Circuit continued, “[t]o the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and the tippee … we hold that such an inference is impermissible in the absence of proof of a meaningfully close relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” Consequently, on appeal, Salman argued that he was not aware of any personal benefit conferred on his brother-in-law, nor was any evidence of this provided.

The Supreme Court disagreed with Salman's contention that “a tipper does not personally benefit unless the tipper's goal in disclosing the inside information is to obtain money, property, or something of tangible value.” In this case, the tipper relayed inside information to his brother (and Salman's friend), and in doing so breached the fiduciary duty by, as defined by Dirks, “mak[ing] a gift of confidential information to a trading relative or friend.” The Court reasoned that, although the tipper did not personally benefit from the information, he “effectively achieved the same result by disclosing the information to [his brother], and allowing him to trade on it.” As a result, the jury was permitted to “infer that the tipper meant to provide the equivalent of a cash gift” and the Court found that the tipper “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.”

***** In the Courts and Business Crimes Hotline were written by Colleen Snow, an associate at Mayer Brown, Washington, DC.