Supreme Court Says Insider Trading Rules Apply to Friends and Relatives

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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Supreme CourtAs reported by the New York Times, the U.S. Supreme Court recently ruled that giving insider information to the insider’s family members violates U.S. securities laws.

Lower courts had been split on the issue of whether an insider had to receive a tangible benefit (such as cash) in order for sharing of insider information to be illegal. The Court, in a unanimous decision, ruled that giving the “gift” of information to a friend or relative benefits the giver.

Insider Trading

The Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit undisclosed trading on inside corporate information by persons bound by a duty of trust and confidence not to exploit that information for their personal advantage.

These people are also forbidden from providing tips of insider information to others. A person who gets such a tip (a “tippee”), knowing that the tip breached the insider’s duty of confidentiality, may be liable for securities fraud if he or she trades on the information.

For example, inside information that a company is about to be sold can make stock prices go up, whereas inside information that a company is at risk of losing an important government contract can make its stock go down. An investor can profit from anticipating a decline in a stock price via a “short sale.”

Mergers and Acquisitions

In the case of Salman v. United States, Maher Kara was an investment banker in Citigroup’s healthcare investment banking group. His job involved dealing with confidential information about mergers and acquisitions.

Maher Kara was close with his older brother, Mounir (“Michael”) Kara. Maher discussed his job with Michael, who had a chemistry background, to gain an understanding of scientific concepts relevant to his job. While their father was fighting cancer, the brothers discussed companies working on new cancer treatments and pain management techniques.

Michael began to trade stocks based on information he got from Maher. At first, Maher was unaware of this, but later he began to actively help his brother.

Michael also shared the information with others — including Bassam Salman, Michael’s friend and Maher’s brother-in-law.

$1.5 Million in Profits

Salman made over $1.5 million by the time he was caught and charged with securities fraud. He was convicted and sentenced to three years in jail and ordered to pay $730,000. He appealed, arguing that: 

a tipper does not personally benefit unless the tipper’s goal in disclosing inside information is to obtain money, property, or something of tangible value.

Government prosecutors had argued that

a tipper personally benefits whenever the tipper discloses confidential trading information for a noncorporate purpose. Accordingly, a gift to a friend, a family member, or anyone else would support the inference that the tipper exploited the trading value of inside information for personal purposes and thus personally benefited from the disclosure.

The Supreme Court agreed with the government and affirmed the conviction.

According to Justice Alito, who wrote the opinion,

By disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients — a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.

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