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The Supreme Court will hear oral arguments and resolve a federal circuit split this fall in Salman v. United States. The Court must decide whether the personal benefit to the insider that is necessary to establish insider trading requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature” – as the Second Circuit has previously held – or whether it is enough that the insider and tippees shared a close family relationship, as the Ninth Circuit held in Salman. This case will also be the first time that the Court decides the liability of a downstream insider trading tippee.

In Salman, a Citigroup investment banker, Maher Kara, shared inside information with his brother, Michael Kara, about upcoming mergers and acquisitions of and by Citigroup clients. Michael Kara then shared that information with his future brother-in-law and Chicago grocery wholesaler, Bassam Salman, who traded on the information. Salman argues that if his insider conviction is affirmed, the federal government will have free rein to prosecute whenever an insider passes along information to a friend or relative. Prosecutors maintain that a reversal in this case would result in more corporate insiders passing along confidential information to friends and family with impunity.

Congress has never clearly defined insider trading. As The Wall Street Journal maintained earlier today in an op-ed piece, the SEC “could define it more clearly, but it resists doing so because the ambiguity benefits regulators and prosecutors who can make up their own standard case by case.” The result, the Journal argues, is “arbitrary enforcement that aggrandizes prosecutors at the expense of the rule of law.” Stay tuned to see if the Supreme Court agrees.
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