On December 6, 2016, the United States Supreme Court issued a dramatic and historic ruling in the high-profile insider trading case of United States of America v. Bassam Yacoub Salman. The Supreme Court's Opinion clarifies some of the uncertainty that developed following the United States Court of Appeals for the Second Circuit vacatur of the insider-trading convictions in United States of America v. Todd Newman and Anthony Chiasson. In affirming the Ninth Circuit, the Supreme Court wrestled with the question of whether a "personal benefit" bestowed upon an insider requires proof of a potential or actual pecuniary gain; or, as the Ninth Circuit found, that proof of a close family relationship between the insider and tippee is sufficient.Indictment and ConvictionOn September 1, 2011, Bassam Yacoub Salman, a/k/a Bessam Jacob Salman was indicted on one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and on four counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. §§ 240.10b-5, 240.10b5-1 and 240.10b5-2, and 18 U.S.C. § 2. United States of America, Plaintiff, v. Bassam Yacoub Salman a/k/a Bassam Jacob Salman, Defendant (Indictment, United States District Court for the Northern District of California / September 1, 2011). The federal jury found Salman guilty on all five counts.9Cir AppealAfter the Northern District of California ("NDCA") denied Salman's motion for a new trial, he appealed to the United States Court of Appeals for the Ninth Circuit ("9Cir"). United States of America, Plaintiff-Appellee, v. Bassam Yacoub Salman, a/k/a Bessam Jacob Salman, Defendant-Appellant. (Opinion, 9Cir, No. 14-10204, 11-CR-00625 / July 6, 2015). The 9Cir Opinion was written by Jed S. Rakoff, Senior District Judge for the U.S. District Court for the Southern District of New York, sitting by designation.The underlying fact patter in US v. Salman involves nuanced and detailed set of events, which largely defy any attempt to simplify them down to a pithy paragraph. As such, consider the "Background" section, in pertinent part, from the 9Cir Opinion:
[I]n 2002, Salman's future brother-in-law Maher Kara joined Citigroup's healthcare investment banking group. Over the next few years, Maher began to discuss aspects of his job with his older brother, Mounir ("Michael") Kara. At first, Maher sought help from Michael, who held an undergraduate degree in chemistry, in understanding scientific concepts relevant to his work in the healthcare and biotechnology sectors. In 2004, when their father was dying of cancer, the focus of the brothers' discussions shifted to companies that were active in the areas of oncology and pain management. 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.Meanwhile, in 2003, Maher Kara became engaged to Salman's sister, Saswan ("Suzie") Salman. Over the course of the engagement, the Kara family and the Salman family grew close. In particular, 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. The brokerage records introduced at trial revealed that, on numerous occasions 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.Of particular relevance here, 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.The Government further presented evidence that Maher and Michael Kara enjoyed a close and mutually beneficial relationship. Specifically, the jury heard testimony that Michael helped pay for Maher's college, that he stood in for their deceased father at Maher's wedding, and, as discussed above, that Michael coached Maher in basic science to help him succeed at his job. 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.Finally, the Government presented evidence that Salman was aware of the Kara brothers' close fraternal relationship. The Salmans and the Karas were tightly knit families, and Salman would have had ample opportunity to observe Michael and Maher's interactions at their regular family gatherings. For example, 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.Pages 4 - 6 of the 9Cir Opinion US v. NewmanAfter Salman's September 2011 conviction, the United States Court of Appeals for the Second Circuit ("2Cir") vacated the insider-trading convictions of two individuals on the ground that the Government had failed to present sufficient evidence that they knew the information they received had been disclosed in breach of a fiduciary duty. DefendantsAs 2Cir held in Newman:
We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.Page 4 of the 2Cir Newman OpinionREAD: "BREAKING STORY: 2 Circuit Overturns Newman And Chiasson Insider Trading Convictions" (BrokeAndBroker.com Blog, December 10, 2014)Accordingly, Salman argued to the 9Cir that under Newman, the Government had failed to prove 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.9Cir AffirmsThe 9Cir found affirmed the jury conviction and found that:
In Salman's case, the jury had more than enough facts, as described above, to infer that when Maher Kara gave inside information to Michael Kara, he knew that there was a potential (indeed, a virtual certainty) that Michael would trade on it. And while Salman may not have been aware of all the details of the Kara brothers' relationship, the jury could easily have found that, as a close friend and member (through marriage) of the close-knit Kara clan, Salman must have known that, when Maher gave confidential information to Michael, he did so with the "intention to benefit" a close relative. Id.Pages 14 -15 of the 9Cir Opinion
1. Does the personal benefit to the insider that is necessary to establish insider tradingunder Dirks v. SEC, 463 U.S. 646 (1983), require proof of "an exchange that isobjective, consequential, and represents at least a potential gain of a pecuniary orsimilarly valuable nature," as the Second Circuit held in United States v. Newman, 773F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (U.S. Oct. 5, 2015), or is it enoughthat the insider and the tippee shared a close family relationship, as the Ninth Circuitheld in this case?
The crime of insider trading that Salman was charged with committing is entirely judge-made. Congress was aware of insider trading when it enacted §10(b), but chose not to address it in that statute. As a result, §10(b) does not mention insider trading, much less define its elements. The statute prohibits only "manipulative" and "deceptive" conduct in connection with the purchase or sale of securities, and there is nothing inherently manipulative or deceptive about insider trading.I. Recognizing that "only Congress, and not the courts . . .can make conduct criminal," Bousley v. United States, 523 U.S. 614, 620-21 (1998), this Court has repeatedly held that §10(b) does not create any general duty to refrain from trading on material nonpublic information, or entitle all investors in the securities markets to parity of information. The Court has, however, read into §10(b) a very limited proscription on insider trading. Under that narrow rule, a "tippee" must refrain from trading on inside information if, and only if, the information was disclosed by an insider in exchange for personal benefit, and the tippee knows that fact. The line between lawful trading and criminal activity, then, is determined by whether the insider-here, Maher-disclosed the information to obtain some personal benefit. If he did not, there was no §10(b) violation, and the "tippee" was free to trade.II. The Court's reasoning in Dirks and other insider trading cases shows that its purpose was to limit §10(b) insider trading and tipping 19 liability to situations where the tipper sought to make money. Cabining securities fraud liability to circumstances where the tipper seeks remuneration also accords with precedents involving similar crimes, where the Court has required the government to prove that the defendant sought money or property. The focus of these fraud crimes, as here, is the improper exploitation of a fiduciary relationship for personal profit. The facts here involve no such misconduct. Maher did not trade or seek any kickback, and was pressured by his brother to leak the information.III. Because of the judicial origin of the §10(b) insider trading crime and the indeterminacy of the Ninth Circuit's standard, the question presented implicates profound constitutional separation-of-powers and due process problems. To avoid those problems, the Court should apply well established principles requiring a narrow construction of criminal statutes, and §10(b) in particular, to limit the ambit of the personal benefit element to core cases where an insider provides a tip in exchange for pecuniary gain. The alternative advanced by the government-that intangible psychological benefits also qualify-is impermissibly vague and would give the government boundless discretion to prosecute the exchange of inside information. If accepted, the government's position would create a general duty to refrain from trading on material nonpublic information, despite this Court's repeated holdings that §10(b) imposes no such duty. 20IV. Salman's convictions should be reversed. Under the correct standard, the government had to prove that Maher tipped his brother Michael in exchange for some pecuniary benefit, and that Salman knew this. There was no evidence of any such pecuniary benefit motive, and thus nothing to know and no crime. Moreover, even if the Court were to adopt a broader definition of personal benefit, it should not extend the implied §10(b) tipping offense to a remote tippee who, like Salman, had no involvement in the insider's alleged fraudulent fiduciary breach.
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 persons bound by a duty of trust and confidence not to exploit that information for their personal advantage. These persons are also forbidden from tipping inside information to others for trading. A tippee who receives such information with the knowledge that its disclosure breached the tipper's duty acquires that duty and may be liable for securities fraud for any undisclosed trading on the information. In Dirks v. SEC, 463 U. S. 646, this Court explained that tippee liability hinges on whether the tipper's disclosure breaches a fiduciary duty, which occurs when the tipper discloses the information for a personal benefit. The Court also held that a personal benefit may be inferred 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." Id., at 664.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, received the information from his brother, Maher Kara, a former investment banker at Citigroup. Maher testified at Salman's trial that he shared inside information with his brother Michael to benefit him and expected him to trade on it, and Michael testified to sharing that information with Salman, who knew that it was from Maher. Salman was convicted.While Salman's appeal to the Ninth Circuit was pending, the Second Circuit decided that Dirks does not permit a fact-finder to infer a personal benefit to the tipper from a gift of confidential information to a trading relative or friend, unless there is "proof of a meaningfully close personal relationship" between tipper and tippee "that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," United States v. Newman, 773 F. 3d 438, 452, cert. denied, 577 U. S. ___. The Ninth Circuit declined to follow Newman so far, holding that Dirks allowed Salman's jury to infer that the tipper breached a duty because he made " Ďa gift of confidential information to a trading relative.' " 792 F. 3d 1087, 1092 (quoting Dirks, 463 U. S., at 664).Held: The Ninth Circuit properly applied Dirks to affirm Salman's conviction. Under Dirks, the jury could infer that the tipper here personally benefited from making a gift of confidential information to a trading relative. Pp. 6-12.(a) Salman contends that a gift of confidential information to a friend or family member alone is insufficient to establish the personal benefit required for tippee liability, claiming that a tipper does not personally benefit unless the tipper's goal in disclosing information is to obtain money, property, or something of tangible value. The Government counters that a gift of confidential information to anyone, not just a "trading relative or friend," is enough to prove securities fraud because a tipper personally benefits through any disclosure of confidential trading information for a personal (non-corporate) purpose. The Government argues that any concerns raised by permitting such an inference are significantly alleviated by other statutory elements prosecutors must satisfy. Pp. 6-8.(b) This Court adheres to the holding in Dirks, which easily resolves the case at hand: "when an insider makes a gift of confidential information to a trading relative or friend . . . [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient," 463 U. S., at 664. In these situations, the tipper personally benefits because giving a gift of trading information to a trading relative 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 acquired and breached by Salman when he traded on the information with full knowledge that it had been improperly disclosed. To the extent that the Second Circuit in Newman held that the tipper must also receive something of a "pecuniary or similarly valuable nature" in exchange for a gift to a trading relative, that rule is inconsistent with Dirks. Pp. 8-10.(c) Salman's arguments to the contrary are rejected. Salman has cited nothing in this Court's precedents that undermines the gift-giving principle this Court announced in Dirks. Nor has he demonstrated that either §10(b) itself or Dirks's gift-giving standard "leav[e] grave uncertainty about how to estimate the risk posed by a crime" or are plagued by "hopeless indeterminacy." Johnson v. United States, 576 U. S. ___, ___, ___. Salman also has shown "no grievous ambiguity or uncertainty that would trigger" the rule of lenity. Barber v. Thomas, 560 U. S. 474, 492 (internal quotation marks omitted). To the contrary, his conduct is in the heartland of Dirks's rule concerning gifts of confidential information to trading relatives. Pp. 10-12.