Standards for Insider Trading Liability Remain Unclear

The Federal courts are grappling with the impact of the Second Circuit’s Newman decision (see our analysis). The Newman decision, though complex in reasoning, boils down to a simple fact: the tippee (Newman) was so far removed from the tipper of the inside information that it was difficult, and the government failed, to prove that Newman knew of any benefit to the tipper. U.S. v. Salman, just decided in the Ninth Circuit Court of Appeals, has an entirely different set of circumstances. Perhaps more importantly, the two courts applied different standards for what constitutes a benefit to the tipper.

The Second Circuit stated that a personal relationship alone was not enough to prove benefit, specifically that the benefit must “represent at least a potential gain of a pecuniary or similarly valuable nature.” However, in Salman, the Ninth Circuit held that the “gift of confidential information to a trading relative or friend” of itself constitutes a benefit. Unlike Newman, it is worth noting that the facts of Salman are all but a slam dunk for the prosecution. Among other things:

  • The tippees in this case are Bessam Yacoub Salman (“Salman”) and Mounir (“Michael”) Kara;
  • The tipper was Maher Kara (“Maher”), an employee with Citigroup’s healthcare investment banking group;
  • Salman and Michael were Maher’s family members;
  • Maher came to Michael for help in understanding chemistry concepts related to his work at Citigroup;
  • Maher provided Michael with inside information that he knew would be traded on;
  • Michael shared this information with Salman, disclosing to him that it was insider information received from Maher;
  • Salman covered his tracks by setting up an account in the name of his sister and husband and destroyed all evidence to “protect” Maher. He then mirrored the trading in Michael’s account;
  • Salman and Michael knew they were trading on insider information;
  • Maher testified he gave Michael the insider information to “benefit him.”

Unlike the Newman decision, where the ultimate tippee was removed from the original tipper by multiple unknown sources, the Salman reasoning is significantly more obvious due to the relationship among the participants, evidence of consciousness of guilt and their admission of key facts. However, the bottom line for firms whose place of business is within the Ninth Circuit’s jurisdiction (including, among others: Alaska, Arizona, California, Nevada, Oregon and Washington) will be subject to a broader standard than that applied in Newman.