Salman v. United States

A person who indirectly receives insider information and trades on that information fully knowing it was improperly disclosed violates Section 10(b) of the Securities Exchange Act and the Securities Exchange Commission’s Rule 10b-5.

Petitioner received trading tips from an extended family member who received the information from Petitioner’s brother-in-law then traded it to Petitioner. Petitioner was convicted for conspiracy and insider trading. Petitioner appealed, arguing that he did not personally profit because he did not personally receive money or property in exchange for the tips, thus he cannot be held responsible. Section 10(b) of the Securities Exchange Act and the Securities and Exchange Commission’s Rule 10b-5 prohibit insider trading by individuals who have a duty of trust and confidence, which includes tipping inside information to others to trade. A person who receives a tip acquires the tipper’s duty if that person knows the information was disclosed in breach of the tipper’s duty. A tippee will only be liable for trading on inside information if the tippee participates in the tipper’s breach of duty, which largely depends on the purpose of the disclosure. Here, the tipper gave insider information to a close relative. Dirks v. SEC, 463 U.S. 646, held that a tipper breaches a fiduciary duty by making a gift of confidential information to a trading relative. The tipper breached his duty by disclosing information to his brother as a gift knowing he would trade on it and Petitioner attained and breached the duty himself by trading on the information fully knowing it had been improperly disclosed.