United States: Major Reversal Of Insider Trading Convictions After Trial: Second Circuit Sets High Bar For Tippee Liability

Last Updated: December 11 2014
Article by Harry Sandick

The United States Court of Appeals today reversed the convictions for insider trading of Todd Newman and Anthony Chiasson.1 The Court held that the government was required to prove, but did not, that the defendants knew that the insider who disclosed the confidential information did so in exchange for a personal benefit. The district court did not instruct the jury that this was an element of insider trading, and the government introduced insufficient evidence on this point (as well as on the issue of whether the insider received a personal benefit). As a result, the convictions are reversed and the indictments are dismissed.2 This is a major reversal for the U.S. Attorney's Office for the Southern District of New York, and it clarifies a rule of law that will make prosecution of remote tippees more difficult than it had been before.

At trial, the government presented evidence that financial analysts received inside information from employees at Dell and NVIDIA about upcoming earnings announcements. The analysts passed the information along to the defendants, who were portfolio managers at hedge funds. The defendants then executed trades that earned a total of $72 million in profits for their hedge funds. There was no evidence that the defendants were aware of the source of the inside information, and the Court of Appeals found that the defendants were three or four levels removed from the insiders who originally breached their fiduciary duties by disclosing the information.3 The Court suggested that this and other recent insider trading prosecutions were novel; it knew of no case in which "a tippee as remote as the defendants had been held criminally liable."4

Defendants asked the district court to grant a motion for acquittal pursuant to Rule 29 in the absence of any evidence that the defendants knew that the insiders had received a personal benefit in exchange for the inside information. In the alternative, they asked the district court to charge the jury that the defendants could be convicted of insider trading only if they knew that the insiders had received a personal benefit in exchange for the inside information. Absent such knowledge, they contended that they were not participants in the tippers' breaches of fiduciary duty to Dell and NVIDIA.5

The district court declined to grant the Rule 29 motion or to give the jury charge requested by the defendants. Instead, the district court charged that the jury needed to find only that (i) the tippers breached their fiduciary duty by disclosing inside information, and (ii) that the recipients of the information – the defendants – knew that the information had been disclosed in breach of a duty of trust or confidence. The jury did not have to find that the defendants knew that the tippers received a benefit for making the disclosure.6

Insider trading is not codified; there is no "insider trading statute." A common law has developed construing the meaning of SEC Rule 10b-5, which generally prohibits securities fraud. Therefore, the Second Circuit's analysis looked at the relevant case law concerning tipping liability. The seminal Supreme Court decision about tippee liability is Dirks v. S.E.C., 463 U.S. 646 (1983), which holds in substance that a corporate insider will have breached his fiduciary duty only when he or she has received some personal gain for the breach of duty. The tippee's duty not to trade on inside information, Dirks held, is derivative of the insider's duty; without some personal benefit to the tipper, there is no liability on the part of the tippee. Both the defense and the government agreed that tippee liability, therefore, requires proof of a personal benefit to the insider.7

The question presented here, however, is whether the defendants needed to be aware of the personal benefit received by the tipper. The Court recognized that it "ha[d] not yet been presented with the question of whether the tippee's knowledge of a tipper's breach requires knowledge of the tipper's personal benefit," but it concluded that "the answer follows naturally from Dirks." Essentially, because the receipt of the personal benefit is a key component of the breach of the fiduciary duty, and because the tippee is liable only if he knows of the breach of the fiduciary duty, it logically follows that the tippee must know about the receipt of the personal benefit. The Court rejected and distinguished the government's interpretation of prior Second Circuit authorities – many of which did not state this as a requirement for insider trading – as "overreliance on . . . prior dicta." The Court viewed its rule as "comport[ing] with well-settled principles of substantive criminal law" inasmuch as defendants must know the facts that make their conduct illegal.8

In light of its reasoning, the Court also noted that other than the district judge who presided at this trial, the other district judges in the Southern District have all held that the tippee must know of the personal benefit in order to be liable.9

The Court held that to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: that

(1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper's breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.10

The Court ruled that the failure to so instruct the jury was not harmless error. The Court proceeded to dismiss the indictment entirely because of the absence of significant evidence at trial that the tippers actually received any personal benefit in exchange for their tips.11 The exchange between the insider and the tippee must be "objective, consequential, and represent[] at least a potential gain of a pecuniary or similarly valuable nature," requiring evidence "of a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter]."12

The Court continued:

Even assuming that the scant evidence described above was sufficient to permit the inference of a personal benefit . . . the government presented absolutely no testimony or any other evidence that [the defendants] knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures, or even that [the defendants] consciously avoided learning of these facts.13

The Government contended that the specificity, timing, and frequency of the updates provided to the defendants were so suspicious that they warranted material inferences supporting an inference that the defendants knew a personal benefit must have been given to the tippers for the information. The Court rejected this argument because (1) the information could have been legitimately obtained from Dell and NVIDIA by those who passed along the information to the defendants and (2) investor relations personnel at these firms routinely leaked earnings data. Moreover, even if the circumstances of the information provided to the defendants supported an inference as to the nature of the source of the information (i.e., that it came from insiders), the detail and specificity of the information could not, by itself, permit an inference as to the source's improper motive.14

This is a very significant ruling that redefines or at least clarifies the elements required for tippee liability. To be sure, many district courts had required knowledge of a personal benefit, such as the Rengan Rajaratnam prosecution, where this requirement helped lead to the defendant's acquittal. However, the law was far from clear prior to today's decision.15 The Court's factual analysis of the sufficiency of the evidence also makes it clear that it will be difficult for the government to establish liability for remote tippees, like the defendants in this case, because such tippees will rarely, if ever, know the reason for the tippers' disclosure of the confidential information. In many cases it will also be hard for the government to show the more explicit quid pro quo between the insider and the initial tippee that the Court seems to require.

It remains to be seen whether the government will seek further appellate review of this decision (the United States Attorney has said this step is being considered), either through a motion for rehearing en banc or through a petition for certiorari to the United States Supreme Court, but both seem like possible outcomes given the limits placed on insider trading prosecutions by today's decision. It also seems inevitable that some defendants who did not know of the tippee's receipt of a personal benefit but who nevertheless pleaded guilty during the course of the recent insider trading investigation that swept up Newman and Chiasson will seek some form of post-conviction relief. The decision also may prompt further calls for congressional action: if we are going to punish insider trading with criminal sanctions, it makes sense to have a statute that clearly defines the crime, for the benefit of all concerned and in order to avoid outcomes like today's decision.


1 United States v. Newman, No. 13-1837-cr (L) (2d Cir. Dec. 10, 2014).

2 Id. at 4

3 Id. at 5-6.

4 Id. at 14-15.

5 Id. at 6-7

6 Id. at 7-8.

7 Id. at 9-12.

8 Id. at 13-18.

9 The Court suggested in a footnote that the government opportunistically added another defendant – Matthew Steinberg – to this indictment only after the district court ruled that knowledge of a personal benefit was not required, suggesting that the government engaged in forum shopping. See id. at 17 n.5. (Steinberg's case, also on appeal, may now be reversed.)

10 Id. at 18.

11 Id. at 19-28.

12 Id. at 22 (quoting United States v. Jiau, 734 F.3d 147, 152-53 (2d Cir. 2013)).

13 Id. at 24.

14 Id. at 25-27.

15 Even the Court today was constrained to acknowledge that it "has been accused of being 'somewhat Delphic' in [its] discussion of what is required to demonstrate tippee liability." Id. at 13 (quoting United States v. Whitman, 904 F. Supp. 2d 363, 371 n.6 (S.D.N.Y. 2012)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions