A recent Second U.S. Circuit Court of Appeals decision has changed the way regulators and plaintiffs’ lawyers are looking at insider trading cases. Since this decision was published, the Securities and Exchange Commission has dropped several high profile cases.
Insider trading involves the purchase and/or sale of securities in a public company by persons who have access to non-public information about the company. Insider trading does not occur when the information is public, e.g., selling an airline stock after a plane crash. Rather, it involves trading on information known only to insiders, e.g., that a company has signed a confidential letter of intent for a major acquisition.
It is unlawful for an insider to buy or sell securities in his own account on the basis of non-public information. It is also unlawful for an insider (a “Tipper”) to give a tip to buy or sell securities to another (a “Tippee”). Moreover, the Tippee can incur civil or criminal liability for acting on a tip.
The elements of a case against a Tippee are:
- The Tipper must have a fiduciary duty or other relationship of trust with the company whose securities are at issue.
- The Tippee must know that the information he received was revealed in breach of that duty.
- The Tippee must know the Tipper received some benefit.
Before the Second Circuit decision in United States v. Newman, many courts and commentators wrote that the third “benefit” element could be met by simply having the position as a friend or relative which implies an intangible benefit. The Newman court disagreed, holding that “vague notions of friendship and networking do not form the basis of the required benefit to the tipper.” Rather, the benefit must be something tangible: “an exchange that is objective, consequential, and represents at least a potential gain of pecuniary or similarly valuable nature.”
Thus is born the benevolent tipper doctrine under the securities insider trading laws applicable to Tippees. Those who get investment advice from Santa Claus or Robin Hood may take some comfort for now.