Insider trading enforcement concerns rise on Supreme Court decision

In a ruling on Tuesday, December 6th, in Salman v. United States, the United States Supreme Court resolved a split among the circuit courts, essentially holding that if an individual gives confidential information to a “trading relative or friend”, it may be inferred that the tipper derived a sufficient benefit to potentially trigger securities fraud liability for the relative or friend.

The case centered on whether an individual who discloses insider information regarding material and non-public matters of a company must also tangibly benefit from such disclosure in order to be considered a breach of insider trading laws.

“[T]he law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public. Today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”

U.S. Attorney Preet Bharara On The Supreme Court’s Decision In Salman v. U.S., December 6, 2016

The Court’s decision was unanimous that Bassam Salman had violated such law by making over $1 million through trading on information that had been provided by Maher Kara, his future brother-in-law.

In writing for the Court, Justice Samuel A. Alito Jr. opined that,

By disclosing confidential information as a gift to his brother with the expectation that he would trade on it…Maher breached his duty of trust and confidence to Citigroup and its clients — a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.

The ruling is expected to make insider trading cases easier to prosecute by regulators.

Action items

  • Directors & Officers (D&O) Liability underwriters may ask about whether 10b5-1 plans are utilized to mitigate risk. Such plans allow insiders to set-up a trading plan that sells stock that they own at pre-determined dates and share amounts. This allows insiders to mitigate potential insider trading risk.
  • Continue to monitor developments in securities enforcement with upcoming changes in regulatory leadership
  • D&O insurance coverage continues to evolve as insurers respond to the “Yates” Memorandum and evolving enforcement tactics.

 

Chris LoRe is a member of the Financial and Executive (FINEX) Practice of Willis Towers Watson based in New York. His current role is advising clients on the design of risk  transfer solutions that address various financial and executive risks. He is responsible to his clients for the analysis and placement of all FINEX-related insurance policies.

Categories: Directors & Officers, Executive Risk | Tags: , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *