White collar pundits have been atwitter since the 2nd U.S. Circuit Court of Appeals’ insider trading decision last December in U.S. v. Newman, 733 F.3d 438 (2d Cir. 2014). There the 2nd Circuit held that, to convict a tippee who traded on inside information, the government must prove that he knew that the insider disclosed the information “in exchange for a personal benefit.”
While that holding was no surprise, the court seemed to drop a bomb with its explanation of what constitutes a personal benefit. For decades, “personal benefit” had been understood to include a gratuitous gift of a tip from one friend to another. Now under Newman, that benefit must be “objective, consequential, and represent at least a potential gain of a pecuniary or similarly valuable nature.” In other words, the tipper must receive (or expect to receive) “something more than the ephemeral benefit of the [tippee’s] friendship.” The good vibe of gifting a buddy may no longer be enough.
The 9th U.S. Circuit Court of Appeals’ decision last week in U.S. v. Salman, 2015 DJDAR 7811 (July 6, 2015), is the ninth reported opinion, and first by an appellate court, to analyze Newman. A remarkable one-third of those – including Salman – were written by U.S. District Judge Jed Rakoff of the Southern District of New York. Tracing the evolution of Judge Rakoff’s view of Newman sheds light on both Newman and Salman and whether there is a split between the two.
It’s fair to say that Judge Rakoff is no fan of Newman’s suggestion that the tipper’s personal benefit must be a pecuniary quid pro quo. In April, he seemed to concede that Newman had so narrowed the definition of “personal benefit,” although he questioned whether that holding could be squared with Dirks v. SEC, 463 U.S. 646 (1983), where the Supreme Court, in “arguably unclear” language, suggested that an insider’s “gift of confidential information,” without any quid pro quo, could suffice. SEC v. Payton, 14-4644 (S.D.N.Y. April 6, 205). Begrudgingly applying Newman’s “more onerous standard,” he concluded that the parties “history of personal favors,” including sharing expenses and help the tippee gave the tipper with a prior legal problem, was sufficient to find a pecuniary benefit to the tipper.
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