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On July 6, 2015, the Ninth Circuit held that “[p]roof that [an] 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” for tippee liability. United States v. Salman, 2015 WL 4068903 (9th Cir. 2015) (Rakoff, J.).[1] The Ninth Circuit declined to follow the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014)[2] “[t]o the extent Newman can be read to go so far” as to require that the insider stood to obtain “‘at least a potential gain of a pecuniary or similarly valuable nature’” for disclosing confidential information to a trading relative or friend (quoting Newman, 773 F.3d 438).

Background

Defendant Bassam Yacoub Salman was convicted of insider trading based on his receipt of information from Michael Kara, who had received the information from his brother, Maher Kara, a Citigroup investment banker. The government presented evidence that Salman “knew full well” that (1) Maher Kara was the source of the information Salman received from Michael Kara, and (2) the two brothers “enjoyed a close and mutually beneficial relationship.”

Salman subsequently appealed his conviction, arguing, inter alia, that the Ninth Circuit should adopt the standard set forth by the Second Circuit in Newman. Salman contended 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.”

Ninth Circuit Declines to Follow the Second Circuit’s Decision in Newman to the Extent Newman Requires That an Insider Receive an Actual or Potential Financial Benefit for Disclosing Confidential Information to a Trading Relative or Friend

On appeal, the Ninth Circuit stated that “[t]he ‘personal benefit’ requirement for tippee liability derives from the Supreme Court’s opinion in Dirks v. S.E.C., 463 U.S. 646 (1983).” Under Dirks, the Ninth Circuit explained, “‘the test is whether the insider personally will benefit, directly or indirectly, from his disclosure’” and whether “‘the tippee knows or should know’ . . . of the [insider’s] personal benefit” gained by disclosing the information (quoting Dirks, 463 U.S. 646). The Dirks Court stated that this “personal benefit” could include “a pecuniary gain or a reputational benefit that will translate into future earnings.” However, as the Ninth Circuit explained, the Dirks Court made clear that “‘[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend’” (quoting Dirks, 463 U.S. 646).

The Ninth Circuit found that “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.” In light of “the Kara brothers’ close relationship,” the court determined that “Salman could readily have inferred Maher’s intent to benefit Michael.” The Ninth Circuit concluded 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.”

The Ninth Circuit expressly declined to follow the Second Circuit’s decision in Newman “[t]o the extent Newman can be read to go so far” as “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.” The court rejected Salman’s contention that the government should have been required to present evidence that Maher received “‘at least a potential gain of a pecuniary or similarly valuable nature’” for disclosing the information to Michael (quoting Newman, 773 F.3d 438). The court reasoned that, if it accepted Salman’s theory, “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.”

The Ninth Circuit also questioned whether Newman in fact requires evidence of such a tangible personal benefit in cases involving disclosures to family members of friends. The court noted that “Newman itself recognized that the ‘personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, . . . the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend’” (quoting Newman, 773 F.3d 438).

The Ninth Circuit affirmed Salman’s conviction, finding the evidence “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.”