W H I T E C O L L A R C R I M I N A L L AW

Must a Tipper Receive a Pecuniary Benet to Establish

Liability in Insider Trading Cases?
CASE AT A GLANCE
A federal jury convicted Bassam Yacoub Salman of one count of conspiracy and four counts of securities
fraud in the Northern District of California. Salman traded and proted on material nonpublic information
he received from his family friend, Mounir Michael Kara. Michael received the information from his
brother Maher Kara, who worked as an investment banker at Citigroup. The district court denied Salmans
motion for a new trial. Salman appealed his conviction to the United States Court of Appeals for the Ninth
Circuit, which afrmed the judgment of the district court. The Ninth Circuit denied rehearing en banc.
Salman led a successful petition for certiorari challenging whether an insider who provides a tip without
receiving monetary reward receives a personal benet under insider trading law. Citing United States v.
Newman, Salman asserts a circuit split exists.

Salman v. United States

Docket No. 15-628
Argument Date: October 5, 2016
From: The Ninth Circuit
by Rachel K. Paulose
DLA Piper, LLP, Minneapolis, MN

ISSUE
Does the personal benefit to the insider that is necessary to
establish insider trading require proof of pecuniary benefit, or
does a close family relationship between the insider and the tippee
suffice where the tipper acts to aid the tippee?

FACTS
Beginning in 2002, Maher Kara worked as an investment banker
in the health care division of Citigroup and thus received access to
valuable nonpublic information regarding his clients current state
and future plans, including prospective mergers and acquisitions.
Although Maher knew he was prohibited from sharing this
inside information with anyone, he routinely conveyed nonpublic
information to his older brother, Michael.
Initially, Maher spoke about his clients in order to obtain Michaels
scientific expertise in understanding the health care field. Over the
next five years, however, Maher suspected Michael of trading on the
nonpublic information. Michael became increasingly demanding
in seeking nonpublic information from Maher. Maher pleaded with
Michael to keep the information secret between the two of them, but
nevertheless he continued to feed Michael nonpublic information.
Though he grew weary of his brothers constant demands for nonpublic information, Maher acceded to Michaels requests to get him
off [Mahers] back.
Maher had an intense relationship with his older brother. Michael
helped pay for Mahers college education, stood in for their deceased
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father at Mahers wedding, and described Maher as his private

counsel to whom he spoke every day. Maher testified he loved
Michael very much and that he offered Michael inside information
to benefit him and fulfill [] whatever needs he had.
In 2003, Maher proposed to Saswan (Suzie) Salman, whom
he married in 2005. Suzie Salmans brother, Bassam Salman,
befriended Michael Kara. By 2004, Michael was sharing Mahers
tips with Salman and encouraging him to trade on the information.
Michael told Salman that Maher was the source of information
and insisted Salman help protect Maher from the consequences of
Mahers revelations.
Salman traded on the nonpublic information he received from
Michael. Salman attempted to hide his activity by trading through
a brokerage account held by his wifes sister and her husband,
Karim Bayyouk. Based on information from Maher conveyed
through Michael about Citigroup clients, Salman repeatedly bought
securities in companies about to be acquired. Salman sold those
securities at great gain after the buyouts became public news.
Salman shared the profits of his trading with Bayyouk. The trading
proved lucrative, as Bayyouks account exploded in value from
$396,000 to about $2.1 million.
Eventually, the scheme came to light, and the government flipped
the Karas to build a case against the downstream tippees. The
Department of Justice (DOJ) charged Salman with insider trading,
including violating Section 10(b) of the Securities Exchange Act of
1934, which reads as follows:

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15 U.S. Code 78j - Manipulative and deceptive devices.

It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national
securities exchange
(b) To use or employ, in connection with the purchase or
sale of any security registered on a national securities
exchange or any security not so registered, or any
securities-based swap agreementany manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors.
Corresponding Rule 10b-5 states as follows:
17 CFR 240.10b-5 - Employment of manipulative and
deceptive devices.
It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce, or of the mails or of any facility of any national
securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
c. To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any person, in connection with the purchase or
sale of any security.
After a trial, the jury on September 30, 2014, found Salman guilty on
all four counts of securities fraud and one count of conspiracy.
Salman moved for a new trial under Fed. R. Crim. Pro. 33, arguing
that the government failed to produce evidence that Maher, the
tipper, shared information in exchange for a personal benefit.
Salman argued that because Maher acted out of good will toward his
brother rather than any ill motive and without even the promise of
personal monetary reward, Maher violated no laws. Salman asserted
no downstream tippees, including Salman, should be held liable
where Maher committed no original fraud.
The court dismissed Salmans claims that he lacked knowledge
of Mahers breach of duty or personal benefit. The district court
reiterated the evidence that Salman knew of Mahers duty to protect
information, including Salmans awareness of Mahers position as
an investment banker; Michaels testimony that he told Salman that
Maher provided the inside information; Michaels admonition to
Salman to protect Maher; Salmans trading close in time to events
causing a price fluctuation; and Salmans use of Bayyouks trading
account. Moreover, the district court held that personal benefit
should be broadly defined to include reputational benefit or the

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benefit of gifting a relative. Thus, the court ruled the evidence was
sufficient to prove Salmans scienter.
Salman also challenged two jury instructions, which he asserted
lowered the governments burden of proof. However, the court first
dismissed Salmans arguments challenging the courts deliberate
ignorance instruction, which ascribed liability where Salman was
highly likely to know he obtained inside information improperly,
but deliberately avoided learning the details of the truth. The court
reiterated that this instruction was proper based on the evidence
of Salmans consciousness of guilt, including his relationship
with Maher, whom he knew worked as an investment banker at
Citigroup; Salmans pattern of trading just before significant public
announcements; Salmans realization of exceptionally large profits;
and Salmans use of his brother-in-laws account to conceal his
actions.
Salman also challenged the courts instruction that Salman need
not know either the specific benefit Maher gained as a result of
improperly disclosing confidential information or the specific rule
Maher violated. Instead, the district court instructed the jury that
Salmans general knowledge that Maher was improperly disclosing
inside information for personal benefit sufficed. Post-trial, the
district court validated its ruling, citing Dirks v. SEC, 463 U.S. 646
(1983).
Accordingly, the district court denied Salmans motion on December
17, 2013.
The United States Court of Appeals for the Ninth Circuit affirmed
the district court on July 6, 2015. Judge Jed S. Rakoff, Senior District
Judge of the Southern District of New York, sitting by designation,
wrote the Ninth Circuits opinion for an undivided panel.
The Ninth Circuit rejected Salmans challenge to the sufficiency of
the evidence. Salman initially neglected to challenge the sufficiency
of the evidence, but the Ninth Circuit gave Salman leave to raise
the issue following the Second Circuits Newman decision. United
States v. Newman, 773 F.3d 438 (2d Cir. 2014). Specifically, Salman
argued the evidence was insufficient to show that Maher disclosed
information for a personal benefit and that Salman knew of that
benefit.
The Ninth Circuit held that the test under Dirks is whether the
insider personally will benefit, directly or indirectly, from his
disclosure. Dirks held that the elements of fiduciary duty and
exploitation of nonpublic information also exist when an insider
makes a gift of confidential information to a trading relative or
friend.
The court rejected Salmans argument that personal benefit be
redefined to include monetary gain. Instead, the court relied on
Mahers own testimony that he sought to benefit Michael and
fulfill whatever needs he had, as well as Michaels testimony
that he told Salman that Maher leaked information and must be
protected. This evidence met the Dirks standard, according to the
Ninth Circuit.
The Court also distinguished Newman, in which the prosecutor
failed to introduce evidence of a meaningfully close relationship
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between the tipper and the tippees, especially the remote tippees.
The Ninth Circuit repeated the Second Circuits criticism of the
prosecution, which presented absolutely no testimony or any other
evidence that [downstream tippees] knew they were trading on
information obtained from insiders, or that those insiders received
any benefit in exchange for such disclosures.
By contrast, the Ninth Circuit found that the government introduced
evidence that Maher breached his duties; disclosed information
to benefit his brother Michael; and Salman knew of this evidence.
The court found Salmans theory that the government need prove a
personal pecuniary benefit to Maher a bridge too far:
If Salmans theory were accepted and this evidence found
to be insufficient, then a corporate insider or other person
in possession of confidential and proprietary information
would be free to disclose that information to her relatives,
and they would be free to trade on it, provided only that
she asked for no tangible compensation in return. 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.
Finally, to the extent that Newman could be read to support Salmans
theory, which the Ninth Circuit took pains to doubt, the Ninth
Circuit made clear it declined to follow Newman.
The Ninth Circuit denied Salmans petition for rehearing en banc on
August 13, 2015.
Salman filed a petition for certiorari on November 10, 2015, citing
a purported circuit split between the Ninth and Second Circuits.
The United States Supreme Court granted certiorari on January 19,
2016.

CASE ANALYSIS
In a dramatic opening salvo, Salman first urges the Court to reverse
decades of precedent and hold that insider trading is not illegal.
Salman notes that neither Section 10(b) nor Rule 10b-5 specifically
prohibit insider trading per se. Therefore, any criminalization of
insider trading is judge-made doctrine interpreting the statute and
rule and what the courts giveth, they ought taketh away. Critically,
Salman insists that insider trading does not involve deceit.
Moreover, Salman claims insider trading involves at worst, lack of
equal information. But Salman argues the Court has not and could
not insist that all individuals have perfectly equal information.
The government responds by urging the Court to reaffirm Dirks. In
contrast to their dueling positions in Dirks, when the DOJ urged
the Court to reject the U.S. Securities and Exchange Commissions
(SECs) legal theory, the two agencies presented a united front
in this case. (Indeed, the DOJ permitted the SEC to be listed
as secondary counsel on its brief to the Supreme Court.) The
government asserts that insider trading necessarily implicates
deception and Salmans notions to the contrary fly in the face of
common sense. Deception is at the heart of insider trading, which
ultimately succeeds precisely only where insiders possess an unfair
advantage unavailable to the market at large. A faithless agent

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who selectively doles out material information violates his duty of

loyalty to the corporation in an act akin to embezzlement, asserts
the government.
Alternatively, Salman argues that even if insider trading is
prohibited, the Court should require the government to show
the original tipper received a pecuniary benefit in exchange for
his original tip. A host of people, including analysts, traders, and
reporters, convey information about the markets on a habitual basis.
The benefit of this information should be criminalized only when
it is communicated for a personal benefit, such as cash or material
gain, says Salman. Salman urges the Court to limit the scienter
requirement to situations where the tippers motive is to obtain
something of real value to himself. No other motive could be said to
implicate fraud, insists Salman.
The government urges the Court to affirm its personal benefit test.
Unless a tip serves corporate interests (as the government now
concedes was clearly the case in Dirks), the tipper and tippee should
be held liable for insider trading. While the government agrees that
not all traders will possess the same information, some sort of ban
on insider trading is required to protect the integrity of the markets.
Any insider who shares material information for love or money
wrongly prioritizes personal interest above shareholder duty.
The government argues that neither Dirks nor the Courts precedent
requires a showing of pecuniary gain to meet the benefit test. The
government points out that Salman makes no effort to explain the
following language in Dirks expressly recognizing that a tippers gift
of information is as problematic as a tippers quid pro quo exchange
of information:
But to determine whether the disclosure itself deceives,
manipulates, or defrauds shareholders, the initial inquiry
is where there has been a breach of duty by the insider.
This requires courts to focus on objective criteria, i.e.,
whether the insider receives a direct or indirect personal
benefit from the disclosure, such as a pecuniary gain
or a reputational benefit that will translate into future
earnings. There are objective facts and circumstances that
often justify such an inference. For example, there may be
a relationship between the insider and the recipient that
suggests a quid pro quo from the latter, or an intention to
benefit the particular recipient. The elements of fiduciary
duty and exploitation of nonpublic information also exist
when an insider makes a gift of confidential information
to a trading relative or friend. The tip and trade resemble
trading by the insider himself followed by a gift of the
profits to the recipient.
Dirks, 463 U.S. at 66364 (internal citations omitted) (emphasis
added).
Salman argues that constitutional principles require that the Court
demand a showing of pecuniary gain. Salman claims that separation
of powers, due process, and rule of lenity concerns require the Court
to refrain from expanding liability for insider trading cases where
the statute itself never employs the term insider trading. Unless
the judicial branch restricted insider trading liability to cases in

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which the tipper received monetary benefit, the executive branch

could deprive persons of their liberty based solely on psychic
reward. This, Salman claims, is a thin reed on which to criminalize
subjective behavior ascertained post hoc.
Citing federal statute after statute conveying congressional intent
to criminalize insider trading, the government counters that Salman
could have no doubt his actions crossed the lines the legislative
branch drew. Dirks was the law of the land for over three decades
until the Second Circuit handed down Newman, in error, according
to the government. Moreover, the government points to actions
Salman took to conceal his trading, including using his brotherin-laws account, to counter Salmans claim that he acted without
criminal intent. Finally, to the extent insider trading cases are
pursued under broad theories, the government justifies its actions
by saying Section 10(b) is a deliberately broad statute meant as a
securities fraud catchall.
Salman queries how a tippers personal satisfaction satisfies the
limiting principles the Court announced in Dirks. Like Maher, Dirks
gave a gift of information for which he expected no personal
reward, says Salman. The Court reversed Dirkss conviction, finding
he possessed no fraudulent motive. Clearly, not every disclosure of
material information implicates insider trading under the Courts
precedent. Salman claims the governments increasingly aggressive
theory of insider trading has led it to label any case lacking a
personal benefit to the tipper as a psychic reward case triggering
insider trading liability. Salman pleads with the Court to stop rubber
stamping the governments purportedly lax exercise of prosecutorial
discretion, particularly as to remote tippees who have no personal
knowledge of the original tippers duties, communications, and
benefits.
The government responds that the Dirks test is objective and
focuses on the tippers purpose. The government identifies the
critical factor in Dirks as the tippers goal: Dirks acted to expose
corporate fraud, not to benefit himself or his cadre. His gift of
information ultimately helped stockholders and the government.
By contrast, Mahers gift helped a select few family members and
exploited corporations in whose best interest Maher failed to act.
Moreover, the government invokes the specter of the slippery slope
were the Court to accept Salmans theory of insider trading. Any
insider could tip any family member or friend without repercussion,
so long as the insider never sought or received a personal benefit.
Such a corrupt legal regime would ultimately throw the capital
markets into turmoil, urges the government. Salmans proposed rule
would also undermine an animating purpose of the securities laws:
to insure honest securities markets and thereby promote investor
confidence, according to the government.
Applying his suggested principles, Salman insists he is not guilty
of insider trading because Maher received no pecuniary benefit
for his original tip. Mahers only motive was to get his pestersome
brother Michael off his back, and the government agrees he
never received anything of material value in return for tipping
Michael. That is, Maher never agreed to divide future profits with
Michael, never suggested any type of return favor from Michael,
and indeed never demanded anything from Michael. Salman claims

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Mahers lack of fraudulent motive also allowed everyone down the

tipping chain, including Salman, to trade on the information Maher
provided without consequence.
The government urges the Court to affirm Salmans conviction
under a straightforward application of Dirks. According to the
government, the evidence showed Maher gave Michael gifts of
inside information, Salman knew Maher acted in violation of his
professional duties, and Salman traded on the material inside
information knowing he possessed an unfair advantage the general
public lacked. Salman profited exorbitantly from this chain of fraud,
at the expense of the companies whose confidences Maher violated.
Such conduct ought not stand, concludes the government.

SIGNIFICANCE
Newman tore down the insider trading edifice the government spent
decades building. However, Salman does not necessarily conflict
with Newman. The Second Circuit made clear in Newman the result
turned on issues of fact; namely, the prosecutors utter failure to
produce any evidence of any knowledge of downstream tippees
linking them to the original tipster. This result could have been
easily rectified with a more careful prosecution, if such evidence
existed.
The government did not make the same mistake in Salman. Indeed,
the government presented strong evidence that Salman knew Maher
was the source of information, Salman knew Maher violated his
own duties in providing nonpublic information, and Maher gave
information to Michael to benefit him.
The question now before the Court is a clean legal question:
assuming the government shows the link between the tipster and
the tipper, is a family or personal relationship sufficient to show
a benefit under Dirks, as the DOJ and SEC have long assumed?
Or was the beneficiary language in Dirks mere dicta that the
government has stretched beyond recognition?
Dirks was an unusual case in which the DOJ actually urged the
Court to reject the SECs legal theory after the SEC prosecuted an
analyst who helped a whistleblower disclose massive securities
fraud. The DOJ viewed Dirks as a hero and viewed the SECs
campaign against Dirks with incredulity. The Supreme Courts
opinion exonerated Dirks and tightened the standard for insider
trading liability, requiring the government to show that the original
tipper provided information for personal gain. Interestingly, the
Dirks Court found the SEC failed to show such personal gain, where
Dirkss only motive was to expose fraud rather than help himself or
anyone else trade in the markets for financial gain.
Through a series of recent cases, including Yates v. United States,
135 S. Ct. 1074 (2015), Elonis v. United States, 575 U.S. ___ (2015),
and most recently, McDonnell v. United States, 579 U.S. ___ (2016),
the Court has been tightening the mens rea requirement,
particularly in white collar criminal cases. A reversal of Salman
would be consistent with the Courts concern that the government
prove scienter in criminal cases.
If Salmans conviction is reversed, or even if the Court uses Salman
to endorse Newman, this case will be the new Lopez: Salman and

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Newman will deal a fatal blow to the governments insider trading

prosecutions where the tipper receives no pecuniary benefit and
his relationship with a downstream tippee is so attenuated that
the tippee is unaware of the benefit the original tipper purportedly
received.

AMICUS BRIEFS
In Support of Petitioner
CATO Institute (Bradley J. Bondi, 212.701.3000)
Daryl M. Paton (Sean Hecker, 212.909.6000)
Mark Cuban (Ralph C. Ferrara, 202.416.6800)

Rachel K. Paulose is a partner at DLA Piper LLP, a former United

States Attorney, and a graduate of Yale Law School. She may be
reached at rachel.paulose@dlapiper.com.
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2016 American Bar Association.

National Association of Criminal Defense Lawyers and the New

York Council of Defense Lawyers (Meir Feder, 212.326.3939)
In Support of Respondent
Occupy the SEC (Akshat Tewary, 732.287.0080)
Richard D. Freer (Sarah M. Shalf, 404.712.4652)

ATTORNEYS FOR THE PARTIES

For Petitioner Bassam Yacoub Salman (Alexandra A.E. Shapiro,
212.257.4880)
For Respondent United States of America (Acting Solicitor General
Ian Heath Gershengorn, 202.514.2217)

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In Support of Neither Party

NYU Center on the Administration of Criminal Law (Stephen L.
Ascher, 212.891.1600)
Securities Industry and Financial Markets Association (Carter G.
Phillips, 202.736.8000)

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