The US Court of Appeals for the Second Circuit recently held that, in order to convict a tippee for insider trading under Section 10(b) of the Securities Act of 1934 and Rule 10b-5, the government must prove beyond a reasonable doubt that the tippee had knowledge of the benefit received by the tipper who breached his or her duty of confidentiality.

Todd Newman and Anthony Chiasson were convicted in May 2013 of insider trading in the US District Court for the Southern District of New York. Newman and Chiasson both received tips from other financial analysts, as well as each other. In 2008, Newman and Chiasson learned of Dell’s and NVIDIA’s upcoming earnings announcements but were far removed from the original insiders. Newman and Chiasson executed trades earning approximately $72 million from trading based on the tips. At trial, the jury was instructed that, in order to convict, it must find that the tippees (Newman and Chiasson) knew that the information was originally disclosed by an insider in breach of a duty of confidentiality, but the jury instruction was silent in regard to whether the defendants must have had knowledge of the original tipper’s personal benefit. 

The Second Circuit held that knowledge of the tipper’s personal benefit is an essential element of insider trading. The government argued that it need only show that the tippee had knowledge of the breach of the duty of confidentiality, not of the personal benefit received in return. The court rejected this argument, criticizing the government for “overreliance on our prior dicta,” and concluding that, for the purpose of insider trading, the insider must have breached a duty of confidentiality in return for a personal benefit, and therefore the tippee’s knowledge of the breach must also include knowledge of the benefit. 

Based on its holding, the court overturned the convictions of Newman and Chiasson. First, the court determined that the omission of knowledge of the tipper’s personal benefit from the jury instruction was not harmless error, as Newman and Chiasson both contested that they had any such knowledge. Second, the court determined that there was insufficient evidence of any personal benefit to the original tippers from Dell and NVIDIA. Third, the court emphasized that it cannot be inferred that Newman and Chiasson knew that the data must have been obtained through breach of the duty of confidentiality for personal benefit, as the record demonstrated the industry custom of leaking earnings results and assisting analysts with their methodology. 

In overturning the convictions, the Second Circuit noted: “Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.”

United States v. Newman, Nos. 13-1837-cr (L), 13-1917-cr (con) (2d Cir. December 10, 2014).