Scope of Criminal Insider Trading Liability for Remote Tippees – United States v. Newman: Second Circuit Reverses Insider Trading Convictions; Requires That Tippee Know of Benefit Received by Insider; Strengthens Evidentiary Showing Required To Prove BenefitSullivan & Cromwell LLP - December 11, 2014
On December 10, 2014, the United States Court of Appeals for the Second Circuit issued an important decision narrowing the scope of so-called tippee liability—the liability of individuals who, though not insiders, receive material, non-public information from insiders either directly or indirectly and trade on the basis of that information. In reversing the insider trading convictions of two hedge fund portfolio managers, the Second Circuit rejected the legal theory pursued by the Government in a number of recent prosecutions of remote tippees, holding that criminal insider trading liability does not attach to a tippee who trades on the basis of material, non-public information unless the tippee knows that the insider disclosed the information in exchange for a “personal benefit.” United States v. Newman, No. 13–1837–cr (L) (2d Cir. Dec. 10, 2014). As an independent ground for reversal, the Court found that the Government had failed to establish the required personal benefit through the evidence it had offered, which showed only ephemeral benefits, such as “career advice” provided by the tippee to the tipper, or a casual friendship between the tipper and tippee.
After Newman, prosecutors will face higher hurdles in imposing insider trading liability on tippees who did not participate in or know of the circumstances surrounding the original disclosure by the tipper. The decision also indicates that provision of inside information to casual friends or acquaintances, absent some receipt by the insider of a pecuniary or similarly valuable benefit, should not result in criminal liability. The Second Circuit’s ruling should not, however, significantly impact prosecutions of quid pro quo exchanges of inside information in return for sufficient personal benefit.