On December 6, 2016, the Supreme Court of the United States decided Salman v. United States, No. 14-462, holding that a trader may be held liable for insider trading under the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5 if the insider who provides the inside information is a friend or relative of the trader, even if the insider receives no financial benefit for passing the tip.
Under the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5, persons bound by a duty of trust and confidence not to exploit insider information are also barred from tipping such insider information to others. Defendant Salman traded on inside information that he received from a relative, who in turn had received it from another relative who was a former investment banker. Both “tippers” expected that the people they gave the information to would trade on it. Salman was arrested and convicted of insider trading. The Ninth Circuit affirmed, rejecting a Second Circuit decision that required a showing that the tipper received or expected a pecuniary gain as a result of the tip.
The Supreme Court affirmed, resting on its decision in Dirks v. SEC, 463 U. S. 646 (1983). The Court rejected Salman’s argument that the “personal benefit” element of the offense required that the tipper intend to gain money, property, or something else of tangible value. The Court reiterated its Dirks holding that “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.” The Court held that by disclosing confidential information as a gift with the expectation that the recipient would trade on the information, the insider breached his duty of trust and confidence, and that Salman acquired and breached that duty when he traded on the information with full knowledge that it had been improperly disclosed.
Justice Alito delivered the decision for a unanimous Court.