Wednesday, July 08, 2015

It's All Relative: Tipping Family Members Is Sufficient to Establish Breach of Fiduciary Duty

By Rodney F. Tonkovic, J.D.

A Ninth Circuit panel has affirmed a conviction arising out of an insider-trading scheme between family members. In the wake of U.S v. Newman, Bassam Yacoub Salman argued that the evidence was insufficient to sustain his conviction. The panel found that the evidence was sufficient because it showed that an insider breached a fiduciary duty by disclosing information to Salman, who knew about the breach when he traded on it (U.S. v. Salman, June 9, 2015, Rakoff, J.).

Background. In 2003, Maher Kara, who worked for Citigroup’s healthcare investment banking group, became engaged to Salman's sister. As time went on, Salman grew close to Kara's brother, Michael, who began to share with Salman inside information that he had learned from Maher. Salman traded through an intermediary and eventually amassed over $2 million from his trades.

On September 1, 2011, Salman was indicted for one count of conspiracy to commit securities fraud and four counts of securities fraud. At trial, the government presented evidence that Salman knew that Maher Kara was the source of the information that he traded on. Maher testified that he gave Michael inside information out of love and for the benefit of his brother, and the evidence demonstrated that Salman was aware of the brothers' close relationship.

Salman was found guilty on all counts. He timely appealed the district court's denial of his motion for a new trial, but, in the meantime, the Second Circuit decided U.S. v. Newman, which held that to establish that a tippee engaged in insider trading, the government must prove – in a criminal case, beyond a reasonable doubt – that the tippee had knowledge of the personal benefit to the tipper and that there is a quid pro quo relationship.

Friends and family. On appeal, Salman urged the Ninth Circuit to adopt the Newman standard, arguing that the evidence was insufficient to find that Maher Kara disclosed information to Michael Kara in exchange for a personal benefit, or, if he did, that Salman knew of any such benefit. Judge Rakoff, writing for the panel, disagreed, finding that the Supreme Court's holding in Dirks v. SEC (1983) governed here. In Dirks, the Court held, as relevant in this case, that a "personal benefit" constituting a breach of fiduciary duty includes the "gift of confidential information to a trading relative."

In this case, Maher Kara's disclosure of confidential information to his brother was exactly the sort of gift envisioned by Dirks. Plus, Michael Kara testified that he told Salman that Maher was the source of the confidential information. There was no question, then, that the evidence was sufficient to find that Maher disclosed information in breach of his fiduciary duty and that Salman knew this.

Salman maintained that Newman interpreted Dirks to require more than just a friendship or familial relationship between tipper and tippee, such as some tangible benefit. The panel rejected this interpretation, saying that it would depart from "the clear holding of Dirks" and, moreover, that Newman itself said that "personal benefit" is broadly defined. "Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading," Judge Rakoff said, and that was what occurred in this case.

The case is No. 14-10204.