Insider Trading and the Personal Benefit Requirement

A recent decision from the United States District Court for the Southern District of New York illustrates the broad reach of prosecutors in pursuing recipients of insider trading tips, despite the case-law requirement that the tipper has received a personal benefit from giving the tip.

In 2014, in United States v. Newman, the U.S. Court of Appeals for the Second Circuit held that to establish liability the government must show a “meaningfully close personal relationship” as well as an exchange of pecuniary value between tipper and tippee. Although it was not entirely clear what the Second Circuit’s words meant, the U.S. Attorney’s Office and the Securities and Exchange Commission understood Newman to be a significant obstacle to their insider trading actions.

In 2016 the Supreme Court rejected Newman, at least in part, in Salman v. United States. That case viewed a tipper’s gift of confidential information to a trading relative or friend as satisfying the personal benefit requirement. A Second Circuit opinion further restricted it; and in December 2018, in a decision denying a motion to dismiss an insider trading case, United States District Judge Jed Rakoff stated that “[w]hat remains of Newman therefore applies in only the rarest of cases” (United States v. Pinto-Thomaz). Whether future courts will follow Judge Rakoff’s lead in setting forth the doctrinal support for insider trading cases is uncertain, but the law in the Second Circuit has plainly traveled a long way since Newman.