Court decisions

Maher Kara was an investment banker in Citigroup’s healthcare investment banking group. In this role he was aware of highly confidential information about mergers and acquisitions involving Citigroup’s clients. Maher and his older brother Michael had a close relationship. After Maher started at Citigroup, he discussed his job responsibilities with Michael. While their father was battling cancer, the brothers discussed companies that provide innovative cancer treatment and pain management techniques. Michael began to buy and sell (i.e. “trade”) securities based on the information Maher shared with him. Initially, Maher was unaware of Michael’s trading activity, but he eventually became aware that it was taking place. Maher subsequently began to assist Michael by sharing confidential information about pending mergers and acquisitions. To avoid detection, Maher sometimes used code words to communicate confidential information to his brother. Other times, he shared information about mergers and acquisitions he was not working on. Michael not only traded on the information he received from Maher, he also shared information with others (including Bassam Salman, who was Michael’s friend and Maher’s brother-in-law ) without Maher’s knowledge. Salman made over $1.5 million in profits as a result of trades based on this information. Salman was subsequently indicted on charges of committing securities fraud for trading on the confidential information he received from Michael and found guilty by a trial court in California. He was sentenced to 36 months of imprisonment, three years of supervised release, and required to pay over $730,000 in restitution (i.e., pay back profits he made from these trades). Salman appealed and requested that the appeal court reverse his conviction. He argued in his appeal that he should not be held liable as a “tippee” because the “tipper” (i.e., Maher, his brother- in-law) did not personally receive money or property in exchange for the confidential information he shared and, thus, did not personally benefit from providing the information. The appeal court in 2014 disagreed and affirmed Salman’s conviction. Precedent In 1983, the U.S. Supreme Court in the Dirks v. SEC case established a test for determining if a “tippee” is liable for trading on inside information. According to this test, a “tippee” is liable for trading on inside information if: 1. The “tipper” breached a “fiduciary duty” by disclosing the information. 2. The tipper discloses the inside information in exchange for a personal benefit (In other words, a court can rule that the tipper is guilty of breaching a fiduciary duty if this occurs). 3. The tipper receives something of value in exchange for the tip OR makes a gift of inside information to a relative or friend who subsequently buys or sells securities based on such information (Thus, if either occurs, a court can rule that the tipper received a personal benefit). A Similar Insider Trading Case Another insider trading case (United States v. Newman) decided in 2014 reached a decision that was inconsistent with the decision reached by the appeals court in Salman’s case. The court in the Newman case reversed a trial court’s conviction of two portfolio managers (the “defendants”) who traded on confidential information. The appeals court ruled that the defendants were not in direct contact with the corporate insiders who provided the confidential information, the defendants were unaware of who the source (i.e., the “tipper”) was of the information they received, that there was no evidence that the tipper received any financial benefit from the information provided to the defendants. Therefore, using the test established in the Dirks v. SEC case, the court concluded that the defendants were not guilty of insider trading. Salman’s Appeal to the U.S. Supreme Court In light of the court’s decision in the Newman case, Salman filed an appeal with the U.S. Supreme Court (the Salman v. United States case). The Supreme Court granted the request to hear Salman’s appeal to resolve the conflicting decisions reached by the appeals courts in the Newman case and Salman’s case. Instructions 1. Create a PowerPoint presentation that answers the Discussion Questions provided below. The PowerPoint slides must be printed and provided to your teacher at the start of your presentation. You must provide references for your research on the last page of the PowerPoint slides. 2. Your grade will be based upon the content of the quality of the answers provided to the Discussion Questions. PowerPoint Presentation Your PowerPoint presentation must include discussion of the following: 1. Introduction: a very brief introduction on what you will be discussing. 2. Analysis: discussion the issues raised in each of the Discussion Questions. 3. Conclusion: summarize the major conclusions that can be made from the information presented in your report and any recommendations you would make. 4. References: list of the reference materials that you used. Discussion Questions 1. What did the court decide in the Salman v. United States case? 2. What is material nonpublic information? Discuss CFA Professional Standard II (Integrity of Capital Markets) regarding the use of material nonpublic information (i.e., “inside information”). 3. Why is insider trading considered unethical and illegal behavior? 4. What is an “insider?” Would Maher Kara be considered an “insider?” Was the information that Maher shared with his brother Michael “inside information?” 5. Regarding insider trading, what is the definition of a “tipper” and “tippee?” 6. According to the test established by the U.S. Supreme Court in the Dirks v. SEC case, a “tippee” is liable for trading on inside information if he/she breaches a “fiduciary duty” by disclosing inside information. What is a fiduciary duty? What does it mean to breach a fiduciary duty? 7. Several academics, including economist Milton Friedman, argue that insider trading should be legal because insider trading: a. Is difficult to prosecute; b. Is a victimless crime (i.e., no one gets harmed); and c. Increases incentives for the officers of a company to make profits. Discuss these views. You may use the Suggested Resources provided below. 8. The UAE Securities & Commodities Exchange Law issued under Federal Law No. 4 of 2000 states that insider trading is prohibited in two ways: a. The “exploitation of nonpublic information that could affect the prices of securities” is prohibited under Article 37 b. “Trading and securities based on non-public or non-disclosed information that is known by virtue of its position” will violate Article 39. What does the phrase “exploitation of nonpublic information mean? 9. Assume that you are the Director of Compliance at the investment bank where Mayer Kara was employed. Based upon what you have learned in this class, discuss any recommendation(s) you would make regarding how to prevent a reoccurrence of a similar case.