In December 2014, the Second Circuit’s decision in U.S. v. Newman addressed two major issues that have changed the analysis in insider trading cases. 773 F.3d 438 (2d Cir. 2014). First, it substantially reduced the potential liability of remote tippees by holding that a tippee cannot be convicted unless the tippee “knows of the personal benefit received by the insider in exchange for the disclosure.” Id. at 448. Second, it held that the “personal benefit” received by the tipper “must be of some consequence” and must be a true quid pro quo, rejecting the notion that mere friendship and association would satisfy. Id. at 452.
Since Newman, the Securities Exchange Commission (the “SEC”) continues to challenge the “personal benefit” definition by relying on evidence of the nature of the relationship between the tipper and tippee. In tippee or remote-tippee liability cases of the Newman-type, the SEC’s argument is persuasive where the SEC can demonstrate sufficient facts that the tippee knew or recklessly disregarded a quid pro quo relationship between the tipper and tippee or that the confidential information was gifted by the tipper upon the tippee. In cases regarding tipper liability, one court has suggested that the mere intent to confer a benefit on the tippee may suffice to meet the personal benefit element. See e.g. Gupta below. However, in assessing remote tippee liability, specifically, the element regarding whether the tippee was aware of the personal benefit, more direct or circumstantial evidence than the fact the tipper and tippee were friends is required. Id. In this blog series, we offer a “year in review,” summarizing a case or two a day that has sought to add clarity to the definition of “personal benefit.”
Immediately after the Newman decision a number of actions were filed to re-open cases for reconsideration under the new-found guidance on personal benefit. U.S. v. Gupta, originally decided on June 15, 2012, was one such case, but Gupta’s motion to vacate was ultimately denied on July 2, 2015.
Gupta moved to vacate his sentence and the judgment against him for securities fraud “on the basis of an argument he raised at trial but abandoned on appeal, viz., that the Court’s instruction to the jury concerning the ‘personal benefit’ element of an insider trading violation under § 10(b) of the Securities Exchange Act of 1934 was erroneous and that the evidence of such benefit adduced at trial was insufficient to sustain his conviction,” which the court determined was “too late and too little.” U.S. v. Gupta, No. 11 Cr. 907(JSR), 2015 WL 4036158, at *1 (S.D.N.Y. July 2, 2015). The court found that Gupta misread Newman where Gupta’s main argument was that “Newman required that a tipper (here Gupta) receive from his tippee (Rajaratnam) a ‘quid pro quo’ in the form of ‘a potential gain of a pecuniary of similarly valuable nature.’” The court explained that Newman was concerned with the liability of a remote tippee, whereas Gupta was convicted as a tipper. That distinction is critical because “the Supreme Court has repeatedly made clear, a tipper is liable for securities fraud if he takes sensitive market information provided to him in a fiduciary capacity and exploits it for some personal benefit.” The court further stated that based on Newman, “a tipper’s intention to benefit the tippee is sufficient to satisfy the benefit requirement so far as the tipper is concerned, and no quid pro quo is required.”