I mentioned a few times during the semester that the Supreme Court was considering an insider trading case this term. They issued their opinion today in Salman v. United States. It was an 8-0 decision with Alito writing the opinion. The opinion is not long and lays out very nicely how insider trading works – at least as to tippees!
It seems a guy named Maher Kara “was an investment banker in Citigroup’s healthcare investment banking group.” He is the source of the inside info. It is info about corporations looking for mergers or acquisitions, thus hiring investment bankers. He gave his older brother Michael the inside info – apparently bunches of times – because he and his brother were very close. Michael used the info to trade in the securities of Maher’s clients. Michael (not Maher) gave the inside info to Salman (the defendant) who also traded on it. Salman was Maher’s brother-in-law and was apparently also close to Michael. The SEC went after Maher, Michael and Salman under Rule 10b(5). Maher and Michael basically confessed but Salman fought the criminal charges. The SEC said that Maher was the “certain person,” and Michael and Salman were tippees.
Question one is how is Maher a certain person? He is not on the boards of the entities whose stock is being traded. Alito points out that either Maher owed fiduciary duties to these entities – thus the “classical theory” – or he misappropriated the info – thus the “misappropriation theory.” Either way he has a duty to disclose or not trade.
But how did his brother Michael get to be a tippee? Alito says “These persons [i.e., “people with fiduciary duties,” i.e., “certain persons”] also may not tip inside information to others for trading,” i.e., tippees. “The tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty, and the tippee may commit securities fraud by trading in disregard of that knowledge. In Dirks v. SEC, 463 U. S. 646 (1983), this Court explained that a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit.”
Did Maher give the info to Michael “in breach of [Maher’s] duty [to the entity]” and “for trading”? Doesn’t really say but Maher knew his brother was using the info to trade. Did Maher receive a personal benefit in giving the info to his brother? Maher must receive a personal benefit before Michael can be a tippee. The supremes say the familial relationship is enough.
But what about Salman? If Michael is a tippee, he has “acquire[d] the tipper’s duty to disclose.” So did he give the info to Salman “in breach of [Michael’s] duty” and “for trading”? Again Michael had the duty because he is a tippee and apparently Salman was using the info to trade. But did Michael receive a personal benefit in giving the info to Salman. In other words, if Michael received a personal benefit by giving the info to Salman, Salman is a tippee and can’t trade. The supremes say a “close personal relationship” is enough.
So suppose I have info about a client of mine. I tell my class one night and ask them to keep the info to themselves. Are the students tippees? It seems like telling them is a breach of my fiduciary duties to my client and the students should know that. But the SEC would also have to show the tip was “for trading” and also that I received a personal benefit. The “for trading” seems tough to prove. The “personal benefit” could be all the new love I get from my students.
It seems to me now that there are only three “certain persons,” i.e., persons who must disclose or not trade:
- A person who owes fiduciary duties to the entity whose security is being traded.
- A person who misappropriates the info.
- A tippee.
A tippee is a person who receives the info from someone who is a) breaching their fiduciary duty by passing on the info, b) passing on the info “for trading,” c) the tippee is receiving a personal benefit.
I tried to comment in class that the original idea behind the “tippee” was the intent of the person with fiduciary duties to avoid the rule to disclose or not trade. The tipper and tippee had to be in cahoots for the purpose of avoiding the rule. The tipper had to get a piece of the action, thus the personal benefit. The SEC tried to expand that to people who got the info in violation of the tipper’s fiduciary duties but where the tipper was otherwise out of the loop. For example, I overhear an insider talking about a merger coming up. The “tipper” has probably breached his fiduciary duty by allowing himself to be overheard but he did not pass along the info “for trading” and “did not receive a personal benefit.” Therefore I am not a tippee and have no duty to disclose.
Another thought to try to close the loop, suppose my paralegal knows some info about a corp that is material non-public info. She knows the info because we work closely together. She has no fiduciary duties to the corp. Can she trade without disclosing the info and stay out of jail? She is clearly not a tippee because I am not giving her the info “for trading” nor even violating my fiduciary duties by giving her the info. She needs the info to do her job helping me. The SEC I’m sure would say that if she trades without disclosing, she has misappropriated the info. Remember the info belongs to the corporation. It is an asset of the corp. That is why Maher above was a “certain person.” He has taken info that belongs to a client and has given it to someone else. What about the person who finds a piece of paper on the ground which has inside info on it? He has no fiduciary duties to the entity and is not a tippee as the tipper, the person who lost the paper, did not receive a benefit from losing it. But the “findee” knows the info is not public, why is he not misappropriating it? That may be where the SEC goes next.