Insider trading has always been hard to prove. Until today, many people don’t know what prosecutors must prove in order to secure insider trading convictions based on confidential tips. Congress has never clearly defined insider trading. The case U.S. v. Salman is essential for the understanding of a clearer definition of insider trading and what one must prove to successfully convict someone on this crime. This case is also unique since it had been two decades that the United States Supreme Court heard an insider trading case before this. It set precedent for any future cases on insider trading since the Supreme Court reached a comprehensible description of insider trading and eventually found Bassam Yacoub Salman guilty.
This paper will explain the facts of the case and the complexity of the decision made by the United States Supreme Court. The beginning will concise the statement of the facts of the case on appeal to the US Supreme Court which will be followed by a brief recitation of the relevant law. Then a statement of the precise issue and the holding will be given. Next, an explanation of the rationale of the circuit court of appeals and an explanation of an opposing point of view will take place. Lastly, this paper will analyze the decisions and include a short conclusion explaining why the Supreme Court’s decision was correct and how this lays ground for the future.
It all began in 2002, when Bassam Salman’s future brother-in-law, Maher Kara, joined Citigroup’s healthcare investment banking group. In the following years, Maher discussed many aspects of the job with his older brother Mounir Kara. Mounir was an expert in the scientific field and Maher needed his help in order to understand ideas in some sectors such as healthcare. The brothers became more interested in this in the fall of 2004, when they learned that their father was dying from cancer. They specifically discussed oncology and pain management companies, which included sensitive information, since Maher’s group had business with some of these companies. Shortly after this, Maher believed that his brother made trades on the information they discussed, specifically on upcoming mergers and acquisitions of Citigroup clients. This went on from late 2004 until early 2007. Mounir became more persistent in his requests for inside information and Maher complied every single time. In 2003, Maher got engaged to Salman’s sister and through this engagement process, both families grew very close, especially Salman and Mounir. In the fall of 2004, Mounir started sharing with Salman the inside information that he heard from his brother. Salman then opened a brokerage account in the name of his wife’s sister and her husband, Karim Bayyouk. Salman and Bayyouk split the profits and mirrored the trades made by Citigroup clients before the information on these transactions went public. Salman and Bayyouk made an estimated $1.7 million as a result of these trades.
The issues in this case are complex as is the law on insider trading. The first issue is if there was a personal benefit for the insider and what constitutes a personal benefit. In a previous case, S.E.C v. Dirks, the Court described that if the insider must receive a personal benefit in exchange for the information, then this is enough evidence to support fraud. The test was if Maher personally benefitted directly or indirectly by releasing this private information to his brother, otherwise Salman could not be held liable. What also had to be proven was that a breach of fiduciary duty was met. A breach of fiduciary duty occurs when the insider makes a gift of confidential information to a trading relative or friend. In the oral argument, Justice Breyer also explained that helping a family member is much like helping yourself, especially in a close knit family such as the Kara family. Lastly, the Court had to decide if there was enough evidence to decide whether Salman knew where the information was coming from.
The jury in the lower court found Salman guilty on all five counts (one count of conspiracy to commit securities fraud and four counts of security fraud). Salman tried to pursue a new trial on the ground of inter alia, but the district court denied his motion. Salman eventually appealed to the Ninth Court of Appeals based on the idea that the government did not possess enough information under the standard announced in U.S. v. Newman. The question here was whether the relationship between Maher and Mounir was sufficient to determine that Maher shared the information with his brother for a personal benefit. The Ninth Circuit granted the motion, found against Salman and the United States Supreme Court granted certiorari.
The Supreme Court affirmed the decision made by the Ninth Circuit Court of Appeals. The justices ruled unanimously (8-0) against Salman. When addressing the breach of fiduciary duty, the Court noted that by being a member of Citigroup, Maher breached his fiduciary duty by releasing private information to his brother. The Court defined that a personal benefit is considered when there is a pecuniary gain or a reputational benefit and that there is no need of a tangible benefit. Maher testified that he intended to fulfill his own needs and to benefit his brother. The Court also took into consideration that helping a family member is comparable to helping yourself, meaning that if Mounir benefitted, then Maher also indirectly benefitted from this insider trading. This is clear enough to state that the personal benefit requirement was fulfilled. And Mounir testified that he had told Salman that he was getting his information from his brother who worked at Citigroup. The Court found this to be sufficient evidence as to the extent of Salman’s knowledge about the insider source.
Salman built his defense on Newman, holding that evidence of a relationship between the insider and tippee is not enough to prove that the insider received benefits. He argued that Maher never received any tangible benefit by tipping his brother. More specifically, Salman included that there must be “at least a potential gain of a pecuniary or similarly valuable nature”. His next argument was that no evidence proved that he knew any of the benefits received by the tipper. The Court ignored Newman because it decided to follow Dirks since it provided a clear interpretation of the breach of fiduciary duty, thus weakening Salman’s arguments. Since Salman was, through marriage, part of the Kara family, the Court believed that Salman must have known that Maher Kara gave his brother the information with the means of benefitting his brother.
This case is one of the most important cases regarding insider trading. Not only did the Court do what was right but it also changed how insider trading cases will be dealt with in the future. If the Court allowed Salman to walk away freely from this case, it would have catastrophic consequences. Any corporate insider or person with inside information would be able to inform his or her family, and they could trade based on this information if the tipper never received a tangible benefit. This would be completely unfair to all of those who play by the rules. It would create chaos, turning the stock market into a money making scheme through insider information.
Even though Salman was only sent to prison for 3 years, everyone should agree with the Court’s decision. By showing that the fiduciary element is completed if there is proof of the intent to benefit the tipper, the Supreme Court has hardened the stance on insider trading for the foreseeable future. Justice Samuel Alito deserves some recognition by using common sense and not allowing Salman to use excuses as an argument. The oral argument is essential in understanding the outcome of this case, as the panel used many hypothetical questions to provide understanding of the complexity of this case. The panel’s tone also created a sense of authority and by not allowing Salman’s lawyer to oversimplify the law on this case, it successfully broke down all of the defendant’s arguments. This case also provides confidence for the SEC to seek more insider trading cases and do what is right. SEC Chairman Mary Jo White stated that “The decision reaffirms our ability to continue to aggressively pursue illegal insider trading and bring wrongdoers to justice”. This doesn’t mean that insider trading will stop but corporate insiders will fear getting caught and think twice before releasing confidential information to relatives.