In its recent decision in United
States v. Newman, the Second Circuit held that, in an insider trading case, the government must
prove that the tippee, the individual who received nonpublic, material
information from an inside source, knew that the corporate insider received a
personal benefit in exchange for disclosing confidential company information.
This holding will require the government to prove
that the tippee was aware that the tipper, who provided the inside information,
received a personal benefit for the disclosure. This holding will also likely
limit the scope of liability for individuals, such as financial analysts and
portfolio managers, who trade on information that is not publicly accessible
but who have no direct relationship with the individuals who provided the
inside information.
Todd
Newman and Anthony Chiasson made millions of dollars for their hedge funds in
2008 by trading on inside information about the earnings for Dell and
NVIDIA. Newman and Chiasson did not
personally know the individual who had originally provided the nonpublic
information about Dell and NVIDIA, and they had received information from
various sources. Nevertheless, the trial court convicted Newman and Chiasson of
securities fraud. The Second Circuit vacated Newman and Chiasson’s convictions
because the court found that there was not enough evidence to prove beyond a
reasonable doubt that Newman and Chiasson knew that the tipper had received a
personal benefit for providing the inside information and that they were
trading on information that the tipper had obtained by breaching his or her
fiduciary duties to his or her employer.
An
individual is not liable for insider trading simply because he or she traded on
information that the individual knew was confidential and nonpublic. To be held
liable, an individual must know or should have known that the individual who
provided the insider information, who is known as the tipper, breached his or
her fiduciary duty by providing the inside information and received a personal
benefit for the disclosure. Thus, in light of the Newman decision, to convict a tippee of insider trading, the
government must prove, beyond a reasonable doubt, that:
(1) The corporate insider or tipper owed
a fiduciary duty to the company that he or she is disclosing nonpublic
information about;
(2) The corporate insider breached his or
her duty by disclosing confidential information to the tippee in exchange for a
personal benefit;
(3) The tippee knew of the tipper’s breach,
knew that the information was confidential and knew that the tippee shared the
confidential information for a personal benefit; and
(4) The tippee used the information to
trade in a security or provided the information to another individual for
personal benefit.
Preet
Bharara, United States Attorney for the Southern District of New York, has petitioned the Second Circuit for a
rehearing in this
case and argues that the court’s decision reflects a departure from precedent
and may impede enforcement of securities laws.
