On December 10, 2014, the Second Circuit issued a decision in United States v. Newman and Chiasson, 13-1837-CR, reversing a conviction and dismissing the indictment with prejudice on the grounds that the government had failed to prove beyond a reasonable doubt that the defendants-tippees knew that the initial tipper (there were several layers of ‘tipping’ between them) had disclosed proprietary information for personal gain.
Judge Parker’s decision in U.S. v. Newman is an important development in the law of insider trading.
In U.S. v. Newman, the government contended that it was enough to prove that the tippee knew or should have known that the initial tipper had disclosed proprietary information in breach of a duty to maintain its confidentiality. The government also contended that a sophisticated player in the securities area would know that a tipper would not disclose such information without an expectation of personal gain of some sort. Rejecting those arguments as foreclosed by earlier Supreme Court decisions (Chiarella v. United States, 445 U.S. 222 (1980), and Dirks v. S.E.C., 463 U.S. 646 (1983)), the Court held that, without proof that the tippee knew that the initial tipper disclosed the information to obtain a substantial personal gain, there was no insider trading violation and no crime. The Court rejected the government’s theory of personal gain by the initial tipper because there are too many situations in which a tipper has disclosed information for reasons other than personal gain (Dirks is an example of one of them), and the kinds of personal benefit the government was invoking (making a new friend, etc.) were too ephemeral to meet the government’s burden of offering proof beyond a reasonable doubt of the defendants’ knowledge or the initial tipper’s motivation.
This decision makes it more difficult for the government (or the SEC) to establish insider trading liability in a case involving a remote tippee, since the more removed the tippee is from the initial corporate insider who disclosed the information, the less information that tippee will have as to the initial tipper’s identity or motives.