By Stuart Sinai
The Supreme Court recently took on the issue of whether leaking information even for nothing in return, i.e., making a gift of material non-public information to a relative or friend, is sufficient to support a criminal conviction of both the tipper and the tippee.
The Supreme Court hadn’t addressed an insider trading matter for almost 20 years and hadn’t considered the gift element in 33 years. A split of opinion between the Federal Courts of Appeal pressed the need for resolution.
The Second Circuit had held in United States v. Newman (2014), that for the “gift” (i.e., a leak to someone not entitled to the information), to rise to the level of criminality, the tipper had to receive something of value, a “personal benefit” in return for the information. The Second Circuit stated that mere disclosure without receiving a personal benefit of some tangible significance, although contrary to an employer’s policies and likely grounds for dismissal, was not a criminal breach of the tipper’s (e.g., an officer, director, employee) fiduciary duty to the corporation.
For the tip to be a criminal act in violation of the Securities Exchange Act of 1933 which prohibits deceptive acts and fraud in the purchase or sale of a security, the Second Circuit held that there was no personal benefit to the tipper unless the leak generated something in return that is “objective, consequential and represented at least a potential gain of pecuniary or similar valuable nature” to the tipper. In the Newman case, the Second Circuit found that the tipper received no money or any other item of tangible value and that his receipt of career advice from his tippee was not a tangible benefit to the tipper. This decision was seen by lawyers as a defense to many insider trading scenarios in which the tipper-leaker ostensibly receives no bribe, no split of the profits, no favors in return.
In 2016, the Ninth Circuit in Salman v. United States completely rejected the Second Circuit’s open door to insider trading and held that leaking information about upcoming events or deals that were confidential and were of substantial importance was a criminal act when made to a relative or friend, who the tipper knows, or should know will trade, even if the tipper received no quid pro quo in return.
The Government argued in Salman that the tips to anyone, not just “a trading relative or friend” was enough to prove securities fraud. The Supreme Court did not go that far. It explained that the tipper in Salman was privy to confidential information about mergers and acquisitions. He provided that information to his brother for nothing of tangible value (referred to as a “gift”) and the brother in turn provided that information to Salman. When caught, the tipper and his brother pleaded guilty and testified against Salman. Salman decided to take his chances at trial. He argued, among other theories, that since the tipper received nothing of value, no “personal benefit,” for the tips that such tipper did not commit a crime and if that tipper did not commit a crime, he, the tippee, also did not, as a tippee’s liability is only derivative of the tipper. The jury didn’t buy his story or theory and he was sentenced to 36 months imprisonment, plus restitution. The Supreme Court in upholding the Salman verdict, made clear, if it wasn’t before, that even tips in exchange for nothing can lead to incarceration of both the tipper and the tippee if the disclosure is for a non-corporate purpose.
Be forewarned that the Justice Department and the SEC will take action against not only the tipper and “his trading relatives or friends” but against any tipper and his tippee. The lesson: keep information to which you have been entrusted to yourself unless discussed for a corporate purpose.
For further information regarding these matters, please contact Mr. Sinai at 248.740.5660 or via email.