Second Circuit Overturns Insider Trading Convictions in Landmark Ruling Narrowing the Scope of Tipper/ Tippee Liability
18th December 2014
Last week, the Second Circuit Court of Appeals held that it is not enough for the government to prove that a tippee knew the corporate insider disclosed confidential information; it must also prove that the tippee knew the tipper did so in exchange for personal benefit. In its decision, the court also narrowed the definition of what constitutes a "personal benefit.” The court found that while personal benefit is broadly defined, it "does not suggest that the government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature." There must be a "meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similar valuable nature."
Because of the circuit's clear decision, the DOJ and other regulators face a significant hurdle in bringing future insider trading charges against "remote" tippees, as prosecutors must prove that those tippees—who often do not know the insiders—knew that insiders conveyed the material non-public information in exchange for some benefit. Newman also makes even immediate tippee cases more difficult to prosecute given the now-limited definition of "personal benefit" of which the tippee must have knowledge.