Circuit Court Decisions Addressing Insider Trading Liability
12.20.18
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(Article from Securities Law Alert, Year in Review 2018)
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Second Circuit: Gifting Confidential Information With an Intent to Benefit the Tippee Satisfies Dirks’ Personal Benefit Requirement, Even If the Tipper Does Not Have a Relationship With the Tippee
On June 25, 2018, the Second Circuit held that Dirks’ personal benefit requirement can be satisfied with evidence that the tipper gifted confidential information with an intent to benefit the tippee, even in the absence of evidence of a personal relationship between the tipper and the tippee.[1] U.S. v. Martoma, 894 F.3d 64 (2d Cir. 2018) (Katzmann, C.J.). The court reasoned that Dirks’ “personal benefit requirement is designed to test the propriety of the tipper’s purpose.” The court found that “it makes perfect sense to permit the government to prove a personal benefit with objective evidence of the tipper’s intent, without requiring in every case some additional evidence of the tipper-tippee relationship.” The court stated that “[t]he tipper’s intention to benefit the tippee proves a breach of fiduciary duty because it demonstrates that the tipper improperly used inside information for personal ends and thus lacked a legitimate corporate purpose.”
[1] In Dirks v. S.E.C., 463 U.S. 646 (1983), the Supreme Court held that the “test” for tippee liability is “whether the insider [the tipper] personally will benefit, directly or indirectly, from his disclosure.” The Dirks Court stated that “there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient.”