Newman Not An Ideal Case For Defining Tippee Liability

On July 30, the government filed a petition for writ of certiorari with the U.S. Supreme Court seeking review of a portion of the Second Circuit Court of Appeals’ decision in U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014). The issue presented in the petition is whether the existence of a casual personal relationship between the corporate insider and a tippee alone can support a finding that the corporate insider derived a “personal benefit” from the disclosure of confidential information sufficient to support a conviction for insider trading.

In Newman, the Second Circuit Court of Appeals vacated the criminal insider trading convictions of two hedge fund portfolio managers. The convicted defendants were two “remote tippees” who were three or four steps removed from the corporate insiders who disclosed the confidential insider information. The trial court instructed the jury that to meet its burden under Dirks v. SEC, 463 U.S. 646 (1983), the government must prove beyond a reasonable doubt that (1) the corporate insiders owed their employers a fiduciary or other duty of trust and confidence, (2) the corporate insiders intentionally breached their duty by disclosing nonpublic information for their personal benefit, (3) the defendants knew the material, nonpublic information had been disclosed in breach of a duty of trust and confidence, and (4) defendants used the information to purchase a security. The trial court did not instruct the jury that the government also was required to prove the defendants knew the corporate insiders obtained a personal benefit from sharing the information.

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