The U.S. Government filed a petition seeking panel and en banc rehearing of the Second Circuit’s December 2014 decision in United States v. Newman and Chiasson, ___ F.3d ___, 2014 WL 6911278 (2d Cir. Dec. 10, 2014). That highly publicized decision – about which we blogged here – overturned insider-trading convictions of two remote tippees by (i) holding that a tippee must know that the insider tipper received a personal benefit for providing the tip and (ii) clarifying or narrowing (depending on one’s interpretation) the definition of what constitutes an actionable personal benefit.
The Government’s rehearing petition, filed on January 23, 2015, makes a relatively surgical strike at the panel’s decision. Although the Government disagreed at trial and on appeal with the defendants’ contention that a tippee must know that the insider tipper received a personal benefit, the Government chose not to seek rehearing of the panel’s holding that such knowledge is required and that the trial court had therefore erred in not including that element in its jury instructions. Instead, the rehearing petition focuses primarily on what the Government contends was an erroneous restriction of the nature of that personal benefit. The Government also argues that the panel erred by vacating the defendants’ convictions and remanding for dismissal of the indictments, instead of remanding for a new trial under different jury instructions.
The Government’s Argument About Personal Benefit
The Newman decision held that a corporate insider entrusted with a fiduciary duty does not breach that duty by disclosing confidential information to a tippee unless he or she does so “in exchange for a personal benefit.” The court ruled that such a personal benefit does not exist unless the disclosure was for a pecuniary gain or was part of “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. . . . [T]his requires evidence of ‘a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].’”
The rehearing petition argues that this “‘exchange’-based, pecuniary limitation on what constitutes a personal benefit” is inconsistent with the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), and conflicts with decisions of other Circuit Courts. The Supreme Court held in Dirks that the insider’s requisite personal benefit may be “direct or indirect” and may involve “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient” – or “a gift of confidential information to a trading relative or friend.” This holding, the Government contends, demonstrates the error of the Second Circuit’s ruling that the Government may not “prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.”
The Government also cites the Seventh Circuit’s ruling in SEC v. Maio, 51 F.3d 623, 632 (7th Cir. 1995), that, “[a]bsent some legitimate reason for [an insider’s] disclosure . . . the inference that [the] disclosure was an improper gift of confidential corporate information is unassailable. After all, [the insider] did not have to make any disclosure, so why tell [the tippee] anything?” In addition, the Government cites the First Circuit’s statement that “the mere giving of a gift to a relative or friend is a sufficient personal benefit.” SEC v. Rocklage 470 F.3d 1, 7 n.4 (1st Cir. 2006).
The Government then takes issue with the factual record that the panel’s decision cited concerning the relationships between the insiders and the initial tippees – relationships that the Government contends were close enough to support the inference that the insiders had received personal benefits and had intended to benefit the initial tippees. And the Government argues that the evidence was sufficient to show that the defendant remote tippees had known about those personal benefits, so the panel should have remanded for a new trial under what it considered to be correct jury instructions.
The fate of the Government’s rehearing petition is uncertain, but such petitions are always long shots. The Second Circuit has held only one en banc rehearing since 2012. While panel rehearings might be more frequent, they are hardly routine – especially where, as here, the panel was unanimous. If the court denies the rehearing petition, the Government could seek a writ of certiorari from the Supreme Court – another long shot, especially in the absence of either a constitutional issue or, perhaps, a direct conflict among the Circuit Courts (although the Government has tried to show that such a conflict exists on the personal-benefit issue).
The rehearing petition notably does not mention the Government’s recent argument that Newman’s holdings on personal benefit apply only in classical-theory insider-trading cases (where the tip comes from a corporate insider and the duty at issue is to the corporation’s shareholders), but not in misappropriation-theory cases (where the tip can come from a corporate outsider and the duty at issue is to the initial source of the information). The Government advanced that argument in United States v. Conradt, but a judge in the Southern District of New York rejected it on January 22 (the day before the Government filed its rehearing petition in Newman), holding that the elements of tipper and tippee liability are the same in classical and in misappropriation cases. (See our blog post here.) The rehearing petition mentions the Government’s loss in Conradt, but does not suggest that the Second Circuit should clarify whether Newman applies only to classical-theory cases or whether it applies to all insider-trading cases. The Government seems to have decided to leave that issue for another day – perhaps in light of the long odds of obtaining a grant of rehearing.