The Second Circuit last week affirmed the conviction of a former corporate executive on charges of insider trading. The court’s unpublished decision on January 14 in United States v. Riley held that the Government had adduced sufficient evidence that the defendant had received a personal benefit – in the form of investment advice – in exchange for providing material nonpublic information to a tippee.
The Riley case involved an appeal by David Riley, a former executive of Foundry Networks, Inc., for providing confidential information about Foundry’s financial condition and impending acquisition by another company. On appeal, Riley argued that the Second Circuit’s 2014 decision in United States v. Newmanrequired more rigorous proof that he had received a personal benefit for providing the inside information.
As explained in an earlier blog post, Newman held that “the mere fact of friendship, particularly of a casual or social nature,” does not prove that a tipper received a personal benefit. To establish a personal benefit from the tipper-tippee relationship, the government must prove 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.” Newman required a “relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].”
Riley challenged two conclusions by the district court that he felt were erroneous in light of the Newmanholding.
First, Riley claimed that any professional investment advice he had received from his tippee was not sufficient to meet the Newman personal-benefit standard because his relationship with the tippee was merely social in nature. The Second Circuit rejected this contention, stating that Riley “mistakenly relie[d] on [Newman]” when making this argument. The tippee’s investment advice to Riley was an “‘immediately pecuniary’ tangible benefit” sufficient under Newman, regardless of “whether or not Riley used or profited from it.”
Second, Riley claimed that a personal-benefit jury instruction given by the trial court was erroneous under the Newman holding. The jury instruction had stated:
Finally, you must determine whether Mr. Riley anticipated receiving a personal benefit of some kind from disclosing the information. The personal benefit does not need to be financial or tangible; it could include, for example, maintaining a useful networking contact, improving Mr. Riley’s reputation, obtaining future financial or employment benefits, or just maintaining or furthering a friendship.
The Second Circuit “assume[d] without deciding” that the Newman standard requires a different jury instruction for the personal-benefit standard. While the Second Circuit did not specifically point out the potentially troublesome language or offer any corrections, it was probably concerned about the reference to “maintaining or furthering a friendship” – a standard that might no longer be sufficient under Newman. Nevertheless, the Second Circuit concluded that different instructions under Newman would not have changed the outcome. The court stated that the “immediate pecuniary [personal] benefit” that Riley received was “sufficiently compelling to leave us in no doubt that a jury instructed consistent with Newmanwould have found Riley guilty.”
The Riley case provides further clarification of what constitutes a tipper’s personal benefit after Newman, highlighting that professional financial advice is sufficient under Newman’s more stringent personal-benefit standard.