Much has already been written about the Second Circuit Court of Appeals’ December 10th insider trading decision: in United States v. Newman, et al., the Court significantly trimmed back the circumstances in which tippees of inside information may be held liable for insider trading.
The Newman decision…
In Newman, the Second Circuit reversed the conviction of two hedge fund portfolio managers who had been accused, as tippees, of violating federal insider trading laws. Both managers apparently knew they were trading on information received from inside tippers at Dell, Inc. and NVIDIA Corporation, but were multiple levels removed from the initial communication of inside information from the tippers.
The Court dismissed the claims against the managers on two separate grounds:
- The government failed to show that the managers, as tippees, knew the inside tippers received “personal benefits” in exchange for the information on which they trade
- The personal benefits received (in this case, casual friendship and career advice) by the tippers were insufficient to establish an insider trading violation as a matter of law.
The Court specifically rejected the government’s contention that “the mere fact of friendship” is sufficient benefit for this purpose. Instead, there must be “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similar value,” or a “quid pro quo” between the inside tipper and the information recipient.
So, what’s new…
It’s no secret that the government has for years taken progressively more creative and aggressive positions regarding insider trading liability. The Second Circuit now has significantly scaled back the potential for tippee liability, particularly where the tippee is one or more levels removed from the tipper. In particular, the government now must show that the tippee knew the insider received a “personal benefit” and that the benefit was more than mere friendship.
And what’s not…
While this makes for interesting reading and may be critically important to federal prosecutors and those who like to trade on illegally tipped information, the rest of us should pause to consider whether anything has really changed.
It still remains true that a company insider is liable if he or she:
- trades in the company’s securities while in possession of material non-public information, or
- discloses confidential company information to a third person in exchange for a personal benefit.
So, from the company or company insider perspective, nothing much has changed.
Notwithstanding the Newman decision, the government remains committed to prosecuting insider trading violations. Therefore, companies must stay committed to educating personnel about insider trading restrictions and must vigorously enforce existing policies.
Although most insider trading policies do not go into detail regarding tippee liability or tipper personal benefits, it might be a good idea to check yours to confirm that no changes are necessary due to the Newman decision. Also, be sure your insider trading training materials are up to speed.