EVERFI Webinar: The latest supreme court rulings on insider trading
1. The Latest Supreme Court
Rulings on Insider Trading
Why the complicated case of a grocer taking
a gift & going to prison matters
2. Introduction
The Supreme Court recently decided Salman v. US, a major
insider trading case against a grocer who cashed in on tips of
inside information, but who wound up holding the bag when
members of his extended family of tippers pleaded out.
4. Insider Trading Vocabulary
● Insider Trading: Trading securities while in possession
of inside information
● Inside Information: Material, nonpublic information
that’s illegal to disclose or trade on
● Fiduciary Duty: In insider trading context, duty not to
disclose or trade on inside information
5. Tipping Inside Information
Just as it’s illegal to trade on inside information, it’s also
illegal to tip others or trade while in possession of the info.
● Tipper: someone who illegally tips inside information
● Tippee: someone who receives a tip of inside
information and trades on it
6. Cases Covered
Salman v. US, 136 S. Ct. 899 (2016)
US v. Salman, 792 F. 3d 1087 (9th Cir. 2015)
US v. Newman, 773 F. 3d 438 (2nd Cir. 2014), cert. denied,
136 S. Ct. 242 ( 2015)
Dirks v. SEC, 463 US 646 (1983)
8. Overview of Salman v. US
● On 12/6/16, Supreme Court upheld grocer’s conviction for
insider trading based on tips from member of extended
family. Salman v. US
● The grocer, Bassam Salman, had argued that the person
who tipped did not gain financially, so Salman should not be
convicted
9. Holding of Salman v. US
Supreme Court held that Salman’s close relationship with the
tipper meant there was no need to prove financial gain
10. Facts of Salman v. US
|→ Citigroup investment banker tipped older brother
|→ Older brother tipped sister-in-law’s brother, Salman
|→ Salman traded on tip
|→ Salman made $$K
11. Charges in Salman v. US
● DOJ brought insider trading/tipping charges
● Brothers plea bargained, fingered Salman
● Salman convicted of insider trading
● Facing $730K and 3 years in prison, Salman appealed to US
Court of Appeals for the 9th Circuit
12. Meanwhile . . .
● 2nd Circuit decided that tipper must gain financially for
tippees to be liable. US v. Newman
● Salman argued that Newman applied to him (no financial
gain by tipper)
● 9th Circuit disagreed, upheld Salman’s criminal conviction
13. Escalating the issue
● Salman petitioned Supreme Court for Cert.
● Government requested, but Supreme Court denied, Cert.
(judicial review) to Newman
● Supreme Court’s denial of Cert. to Newman looked good for
Salman
Here’s why . . .
14. Newman looked good because . . .
Denial of Cert. to Newman seemed to mean Supreme Court
agreed with holding that the tippees were not guilty of insider
trading when:
● Tippees were not close to tippers (didn’t even know them)
● Tippers didn’t gain financially
15. Newman looked good because . . .
Denial of Cert. to Newman seemed to mean Supreme Court
agreed with holding that the tippees were not guilty of insider
trading when:
● Tippees were not close to tippers (didn’t even know them)
● Tippers didn’t gain financially
16. Newman looked good because . . .
Denial of Cert. to Newman seemed to mean Supreme Court
agreed with holding that the tippees were not guilty of insider
trading when:
● Tippees were not close to tippers (didn’t even know them)
● Tippers did not gain financially
17. Newman looked good because . . .
In Salman’s case:
● Even though tippees were not close to tippers (didn’t even
know knew them well)
● Tippers did not gain financially
18. Supreme Court had other ideas
Supreme Court disagreed with Newman for saying that tipper
must gain financially to prove the tippee was guilty
Instead, Supreme Court relied on precedent that says tippee
who participates in tipper’s breach of fiduciary duty for personal
gain is liable (Dirks v. SEC)
19. Personal gain includes gifts
Holding: “personal gain” can include a gift of a tip to a close
trading relative (close family or friend)
Giving a gift of trading information is the same thing as trading by
the tipper followed by a gift of the proceeds.
-- US SUPREME COURT
20. Salman’s Fate
Salman’s conviction upheld because:
● He knew that the inside info originated from a breach of
tipper’s fiduciary duty
● He participated in tipper’s breach of fiduciary duty by trading
on inside info
● Tipper gained personally by his gift to trading relative
21. Salman Summarized
● Tipping means tipper gains personal benefit for disclosing
inside information in breach of fiduciary duty
● Personal benefit includes gift of inside information to close
family or friends
● Family or friends participate in crime by trading based on gift,
knowing tipper’s breach of duty
● Both tipper and tippee culpable
23. Legal Consequences
● Prosecutors (SEC & DOJ) now can prosecute gifts of inside
information even if no monetary gain
● Court did not say whether rule applies to tippees other than
“close” family and friends who know tipper breached duty
○ How “close” do tippees need to be to tipper?
○ Could a gift to a stranger be included?
○ Ask SEC & DOJ
25. Practical Consequences
● Insider trading hurts investors and markets, is a conflict of
interest even if not clearly illegal -- need to know red flags
● Effective compliance programs essential in face of legal
uncertainty (like twists and turns of this case)
26. Compliance Considerations
● Reading headlines about insider trading not enough
● General knowledge, or general policy statements, although
crucial, are not enough
● Hard to predict how the law will apply to particular situations
(rejection of Cert. to Newman did not look so good for
Salman after all)
27. Poll Question #2
Are you concerned about the SEC/DOJ future interpretation of
this ruling?
28. Sidebar
Older Insider Trading course
→ no interactive scenario involving
tipping & personal gain
Denial of Cert. to
Newman affected
compliance training
29. Sidebar
Older Insider Trading course
→ no interactive scenarios
involving tipping & personal gain
Newer Insider Trading course →
→ added interactive scenario
involving monetary gain by tipper
Denial of Cert. to
Newman affected
compliance training
30. Sidebar
Older Insider Trading course
→ no interactive scenarios
involving tipping & personal gain
Newer Insider Trading course →
→ added interactive scenario
involving monetary gain by tipper
Salman affected
compliance training
31. Sidebar
Older Insider Trading course
→ no interactive scenarios
involving tipping & personal gain
Newer Insider Trading course →
→ added interactive scenario
involving monetary gain by tipper
→ added interactive scenario
involving gifting by tipper
Salman affected
compliance training
32. Compliance Problems
Salman & related cases illustrate nuanced situations where the
law would apply differently depending on the facts
A compliance program that does not effectively communicate
this, or fails to give employees practical examples (better yet,
practice) dealing with gray areas, does everyone a disservice
33. Compliance Solutions
Interactive training, vetted and put together by legal and
instructional experts, helps employees negotiate nuanced
situations they may encounter every day.
________________________________
For additional discussion, please see:
● Tips as Gifts: Insider Trading Liability for Family & Friends After Salman
● Cui Bono? Tippee Liability for Insider Trading after Newman, pending Salman
34. Poll Question #3
Do you feel your current insider trading training effectively
addresses the risk of insider trading?
