Recent decisions try to clarify insider trading liability, but may have caused more confusion. In United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Second Circuit explained that to be convicted of insider trading, the tippee must have knowledge that the insider tipper disclosed information in exchange for a personal benefit. What does this mean? In Newman, the tipper and tippee attended business school together and had been colleagues, but they were not “close.” The tippee provided career advice and assistance to tipper, but the advice began before the tipper gave the tippee any information, and the tippee testified that he would have given it as a routine professional courtesy without receiving anything in return. The court further explained in connection with another set of trades, that the insider and his tippee were “family friends” who met through church and occasionally socialized with one another. The tippee testified that he did not provide anything of value in return for the tips, and that the tipper did not know that the tippee was making trades. The Second Circuit held that this evidence was insufficient to establish that the tippers received a personal benefit in exchange for the tip. The court further explained that there needed to be “proof 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.” In other words, a relationship that suggests a quid pro quo from the recipient.
Less than a year later, the Ninth Circuit weighed in on the issue. In United States v. Salman, 792 F.3d 1087 (9th Cir. 2015), there was an alleged insider-trading scheme involving extended family members. The tipper testified that he disclosed material nonpublic information for the purpose of benefitting his brother. The court explained that if the tippers theory were accepted (no evidence that tipper received any benefit) and this was enough, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return. Rather, the Ninth Circuit explained that proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading. Accordingly, a tippee could be liable for insider trading in the absence of any proof that the tipper expected any benefit for the insider information.