In its highly anticipated decision in U.S. v. Newman, the U.S. Court of Appeals for the Second Circuit held on Dec. 10 that to sustain insider trading charges against a tippee who trades on material nonpublic information, the government must prove that the tippee knew that the tipper disclosed the information in breach of a duty of trust and confidence in order to receive a personal benefit. The court further explained that the benefit must be objective and consequential. In doing so, the court criticized the government for “the doctrinal novelty of its recent insider trading prosecutions,” which the court described as “increasingly targeted at remote tippees many levels removed from corporate insiders.” Slip op. at 14. Even more importantly, the court cleared up legal questions that for years had allowed the government to assert expansive views of insider trading liability that produced countless guilty pleas and settlements in cases involving increasingly remote tippees and amorphous benefits. In particular, Newmandirectly contradicts the long-standing position of prosecutors and the Securities and Exchange Commission (“SEC”) that mere ephemeral benefits would suffice to constitute the breach, and that the tippee need not know that a personal benefit was the quid pro quo for the improper disclosure. Accordingly, the decision is expected to present new obstacles to criminal prosecutions and SEC enforcement actions alleging insider trading violations, particularly against remote tippees.
Click here to read more about the Second Circuit’s decision.