Receiving Stock Market Tips from Family or Friends May Impose Liability

Section 10(b) of the Securities Exchange Act of 1934 broadly prohibits fraud in the buying and selling of publicly traded securities. Under this standard, utilizing material (significant) non-public information may be fraudulent. Market tips concerning this information from "individuals who are under a duty of trust and confidence" may impose liability on tippers and tippees (those receiving tips).

Many years of rulemaking and judicial decisions have created a legal specialty concerning every analytical detail from the definition of "security" to the precise persons covered and forms of conduct that are unlawful. This comment briefly notes the essence of a December 6, 2016, U.S. Supreme Court decision that continues this discourse. Always consult experienced legal and accounting professionals in specific situations.

In broad overview, the U.S. Supreme Court on December 6 in a unanimous decision written by Justice Alito held that a gift of confidential information without compensation by a corporate insider to a relative or friend who trades on it is sufficient to impose liability on the tippee [Salman v. United States].

In this case, the criminal defendant Salman "received lucrative trading tips from an extended family member, who had received the information from Salman's brother-in-law." The original source of the information was a former investment banker at Citigroup.

Without discussing the Supreme Court's analysis in detail, it is noteworthy that the Court concluded that making a gift of confidential inside information to "a trading relative or friend" "is the same thing as trading by the tipper followed by a gift of the proceeds." The tipper need not receive anything of value from the tippee as benefit under these circumstances may be inferred. The Court based much of its analysis on a somewhat broad reading of its 1983 decision, Dirks v. SEC. However, a detailed discussion is beyond the scope of this brief takeaway.

Hence, be aware that receiving and trading on stock market tips from family and friends may impose liability. Be cautious. Apparently "easy" money may prove to be quite costly.

This comment provides a very brief and incomplete educational overview of a single complex U.S. Supreme Court decision and is not intended to provide legal advice. Always consult an experienced attorney in specific situations.