On December 6, 2016 the United States Supreme Court unanimously upheld a California insider trading conviction, which will make is easier for prosecutors to bring certain cases against many parties. This was the first insider trading case to be heard by the Court in two decades and resolves a question that has divided federal appeal courts.
Bassam Yacoub Salman, a onetime Chicago grocery wholesaler, was indicted for federal securities fraud crimes for trading on insider information that he received from a friend, Michael Kara, who in turn, received the information from his brother, Maher Kara, a former investment banker at Citigroup. Through trades based on this information, Salman and a partner earned more than $1.5 million in profits.
The Court ruled that it is criminal for a person to make trades even when the insider who provided the tip was not attempting to make money. Instead, it is enough if the insider gave the information as a gift to a party likely to trade on it. This is a complete rejection of a previous New York Court ruling which stated that the insider must “receive something of pecuniary or similarly valuable nature in exchange for a gift to family or friend.” Therefore, this ruling may undercut efforts by some Wall Street executives to overturn their own insider trading convictions.
In arriving at this decision, the Court centered on Maher Kara’s motivations, instead of Salman’s conduct. Justice Alito delivered the opinion of the Court and state, “[b]y 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.”
The Securities and Exchange Commission’s Rule 10b-5 prohibits undisclosed trading on inside corporate information by persons bound by a duty of trust and confidence not to exploit that information from their personal advantage. The Supreme Court detailed this act in 1983 through the case Dirks v. SEC. Here, the Court concluded that the insider had to receive a “personal benefit” from the disclosure. This case also allows for a factfinder to infer a personal benefit to the tipper from a gift of confidential information to a trading relative or friend. Justice Alito then cited the Dirks ruling in the opinion of the Salman case. He stated, “Dirks specifies that when a tipper gives insider 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.”
If you are a party in a case that involves insider trading, please contact the experienced attorneys at Shein & Brandenburg. Our team is dedicated to keeping up to date with the current laws in this area. We will help explain the laws as they pertain to your case and provide you with expert representation.