Salman v. United States

Supreme Court of the United States · 2016 · Corporations

CorporationsInsider tradingTippee liabilitySection 10(b)Rule 10b-5insider tradingtippertippee

Facts

Maher Kara, an investment banker at Citigroup, possessed highly confidential merger and acquisition information and shared it with his brother Michael, sometimes using code words and disclosing deal information to assist Michael's trading. Maher testified that he gave Michael inside information to benefit and help him, and expected Michael to trade on it. Michael then passed the information to Salman, his friend and Maher's brother-in-law, and told Salman that Maher was the source. Salman traded on the tips and made over $1.5 million in profits.

Issue

Whether, under Section 10(b) and Rule 10b-5 as interpreted in Dirks, a tipper personally benefits from disclosing inside information by making a gift of that information to a trading relative or friend, even if the tipper receives no money, property, or other tangible consideration in exchange. Relatedly, whether a tippee who knows of that gift-based breach may be held liable for trading on the information.

Rule

A tippee is liable for trading on inside information only if the tippee participates in a breach of the tipper's fiduciary duty, and the tipper breaches that duty when the tipper discloses inside information for a personal benefit. Under Dirks, that personal benefit may be inferred when the tipper makes a gift of confidential information to a trading relative or friend, because such a gift is the equivalent of the tipper trading on the information and then giving the proceeds to the recipient; no additional showing of pecuniary or similarly valuable consideration is required in that circumstance.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nina Patel works on confidential acquisition deals for Harbor Crest Advisory in Chicago. She secretly tells her brother Arjun the target company’s name so he can buy shares before the announcement, and Arjun does so; Nina receives no money or property from him.

If Arjun is prosecuted as a tippee and the government proves he knew Nina intentionally disclosed the information so he could trade, which is the strongest argument for liability?

Explanation. The controlling rule is that a tipper breaches a fiduciary duty by disclosing inside information for a personal benefit, and that benefit may be inferred when the tipper makes a gift of confidential information to a trading relative or friend. No separate showing of pecuniary or similarly valuable consideration is required in that gift-to-relative-or-friend setting. If Arjun knew Nina made that improper gift with the expectation he would trade, tippee liability may follow.