The US Supreme Court has refused to hear an appeal in United States v. Newman and Chiasson, where the Second Circuit overturned the convictions of two hedge fund managers on the basis that the insider tipper did not receive a sufficient personal benefit in exchange for the disclosure of material non-public information ("MNPI"). In particular, the Second Circuit held that this personal benefit had to be more than a "mere fact of friendship, particularly of a casual or social nature." Instead it had to 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 similarly valuable nature."
This personal benefit test is considered to impose a higher bar on the government than the test under Dirks v. SEC which suggested that all that was required was "a gift of confidential information to a trading relative or friend."
Following the decision in Newman, five people have had their claims dismissed on the grounds that their conduct did not satisfy the heightened personal benefit test. Four of these had previously pleaded guilty to insider trading. Other appeals against insider trading convictions had been adjourned until the Supreme Court made a decision on whether to grant certiorari on the Newman appeal.
The Second Circuit Newman decision has been criticized by commentators and other courts, because of the increased difficulty of convicting insider trader tippees, which, in the words of the government's appeal "insulates from liability deceptive acts that undermine the integrity of the markets." In particular, the Ninth Circuit, in United States v. Salman, in an opinion authored by Judge Jed Rakoff, who usually sits in a court overseen the Second Circuit, "declined to follow" Newman to the extent that it required a heightened personal benefit to the insider tipper. Instead, the court held that making a gift of MNPI to a trading relative or friend was sufficient benefit for insider trading purposes (following Dirks).
As is customary, the Supreme Court did not give reasons for its declination. One theory is that it declined to hear the case because, even if the Supreme Court agreed with the government's position on the personal benefit test, Newman and Chiasson would still not be found guilty of insider trading. This is because the Second Circuit had ruled that it found that Newman and Chiasson had to know that the insider tipper received a personal benefit, and that there was no evidence presented that they did know of the benefit. This issue was not appealed to the Supreme Court which means that any decision would be an "advisory opinion" that would not change the position of Newman and Chiasson.
The effect of the Supreme Court's decision is likely to involve a flurry of further appeals against insider trading convictions as well as a reluctance on the part of the Department of Justice and SEC to bring charges and enforcement action against tippees like Newman and Chiasson where the personal benefit to the insider tipper is not clearly evident.