United States: Friends With Benefits: Second Circuit Overturns Newman And Chiasson Convictions And Raises The Government’s Burden In Insider Trading Cases Against Tippees

Last Updated: December 23 2014
Article by Jodi L. Avergun and Douglas H. Fischer

Most Read Contributor in United States, September 2018

In a blow to insider trading prosecutions against downstream recipients of inside information, on Dec. 10 the U.S. Court of Appeals for the Second Circuit overturned the May 2013 convictions of Todd Newman and Anthony Chiasson (see related story, page 1711). In its watershed opinion, the court ruled that ''in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information in exchange for a personal benefit.'' Importantly, the court chided the government for the ''doctrinal novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.''

As a result of the ruling, both the Department of Justice and the Securities and Exchange Commission are likely to face significant hurdles to successfully prosecuting insider trading cases where the tippee is several degrees removed from the insider. These challenges could force the government to reconsider its aggressive approach toward downstream tippees.

Previously Muddled Standards for Establishing Tippee Liability

It is well-established that trading based upon material nonpublic information only violates Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10-b5 when that information was obtained in violation of a duty of trust and confidence owed to another party. See, e.g., Dirks v. SEC, 463 U.S. 646, 654-49 (1983). However, the standards for determining when a breach has occurred and when the tippee has knowledge of the breach have been unclear.

The genesis of the issue in United States v. Newman can be traced back to Dirks,1 which introduced a new analysis for determining when a breach of duty had occurred. Dirks was an officer of a broker-dealer who learned about fraud within a life insurance company, Equity Funding, from a former officer of the insurance company. Dirks alerted his clients to the fraud, and those clients sold their interests in Equity Funding. The court explained that whether an insider's disclosure of material nonpublic information constituted a breach of duty depends upon ''whether the insider will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. Absent a breach by the insider, there is no derivative breach.''2

Some commentators and litigants have read Dirks as reasoning that if one does not know of the tipper's personal gain, then one could not know of the tipper's breach. Thus, in their view, Dirks arguably requires that the government prove a tippee's knowledge of a benefit to the tipper who violated a fiduciary duty. Others, however, view Dirks as requiring the government to prove that the tipper received some benefit, but not prove that the tippee knew of that benefit. Lower courts have been inconsistent in their interpretations of Dirks, so it was unclear whether the government was required to prove a tippee's knowledge of the tipper's benefit when the tippee was several degrees removed from the tipper. In some cases within the Second Circuit, the court has required the government to demonstrate that a tippee knew of the benefit to the tipper.3 However, in other cases in the Second Circuit, courts did not mention that requirement.4

In 2012, the Second Circuit decided SEC v. Obus, a significant insider trading case, but did not explicitly address whether the government must establish a tippee's knowledge of the benefit gained by the original tipper.5 In Obus, the insider, Stickland, was an employee of GE Capital who learned about Allied Capital Corporation's planned acquisition of SunSource, Inc by virtue of his work performing diligence on SunSource on behalf of Allied Capital. Strickland allegedly tipped his college friend, Black, about the acquisition. Black, in turn, allegedly tipped his colleague, Obus, who traded in SunSource stock. Evidence was contradictory as to whether Obus had been told about the impending acquisition and, if so, whether he knew the identity of the original source of that information. The district court held that the SEC ''failed to present sufficient evidence that Obus subjectively believed the information he received was obtained in breach of a fiduciary duty.''6 On appeal, the Second Circuit stated that for a tipper to be held liable, the government must demonstrate that he or she received a benefit for breaching a duty of trust and confidence. But with respect to establishing tippees' liability, the court did not explicitly mention any requirement to establish a tippee's knowledge of the benefit to a tipper. Rather, the court held that a tippee ''must know or have reason to know that the information was obtained and transmitted through a breach.'' Applying its holding to Obus, the Second Circuit held that there was sufficient evidence ''to allow a jury to infer that Obus was aware that Strickland's position with GE Capital exposed Strickland to information that Strickland should have kept confidential.''7

Despite Obus's silence on any requirement that the government prove a tippee's knowledge of a benefit to the tipper, Judge Rakoff of the U.S. District Court of the Southern District of New York held, in a post-Obus case, that Dirks requires the government to show the tippee ''understands that some benefit, however modest, is being provided [to the tipper] in return for the information.''8 In his opinion, Judge Rakoff described Obus as ''Delphic,'' observing that, under Obus, the government had to demonstrate that a tipper received a personal benefit to prove the tipper's liability. He persuasively reasoned that ''if the only way to know whether the tipper is violating the law is to know whether the tipper is anticipating something in return for the unauthorized disclosure, then the tippee must have knowledge that such self-dealing occurred, for without such a knowledge requirement, the tippee does not know if there has been an 'improper' disclosure of inside information.'' Judge Rakoff recognized that knowledge of a tipper's benefit could be difficult to establish with respect to tippees several links down a tipping chain, but dismissed this concern as ''a product of the topsy-turvy like way the law of insider trading has developed in the courts.''9

'United States v. Newman': The Second Circuit Requires the Government To Demonstrate a Tippee's Knowledge Of the Tipper's Benefit

In United States v. Newman, the U.S. Attorney's Office for the Southern District of New York prosecuted several members of an alleged insider trading ring, including Anthony Chiasson and Todd Newman. Chiasson was a hedge fund portfolio manager who allegedly received insider information from several analysts, who in turn had received that information through a chain of other sources. The government alleged that Chiasson was the fifth person in a tipping chain concerning Dell. Importantly, the government did not allege that Chiasson knew the identity of the insider, but rather alleged that given the circumstances and content of the tip (information on Dell's upcoming financials), and Chiasson's knowledge the information originated from a Dell insider, he must have known the information was tipped in violation of a duty. The government also alleged that Chiasson traded on material nonpublic information about NVIDIA that he received through a similar five-link tipping chain. Unlike with the Dell tipping chain, Chiasson knew that the NVIDIA information had originated from an employee of NVIDIA, although he did not know the insider personally. The government alleged Newman was involved in tipping chains similar to the ones from which Chiasson received information.

The district court instructed the jury that the government had to prove (1) that the insiders had a ''fiduciary or other relationship of trust and confidence'' with their corporations; (2) that they ''breached that duty of trust and confidence by disclosing material, nonpublic information''; (3) that they ''personally benefitted in some way'' from the disclosure; (4) ''that the defendant you are considering knew the information he obtained had been disclosed in a breach of duty''; and (5) that the defendant used the information to purchase a security. After receiving these instructions, the jury convicted Chi asson and Newman for insider trading and conspiracy to commit the same.

Chiasson and Newman argued on appeal that the jury instruction were improper because the court did not require the government to prove that the defendants knew that the insiders received a benefit for violating their respective duties of trust and confidence. Chiasson and Newman argued that under the instructions, ''a defendant could be convicted merely if he knew that an insider had divulged information that was required to be kept confidential.''10 Such a consequence, they argued, ignored Dirks, which establishes that a benefit to the tipper is a prerequisite to finding the tipper has breached a duty. To support their position that not all unauthorized disclosures constitute breaches of a duty of trust and confidence, Chiasson and Newman pointed to the SEC's adoption of Regulation FD, which prohibits selective disclosures that do not necessarily entail the breach of a duty of confidence and trust. Because material nonpublic information can be leaked without implicating a breach of duty, Chiasson and Newman argued, the government must prove the defendants' knowledge of the one factor that establishes a breach has occurred—the personal benefit gained by the tipper. Additionally, Newman and Chiasson argued that the Exchange Act's requirement that a violation be ''willful,'' as well as traditional criminal law principles of mens rea, require a defendant to know all the facts that make an act illegal in order to be convicted.

The government, on the other hand, argued that Dirks requires only that the government prove the tipper received a personal benefit—not that the tippee knew of that benefit. It pointed to several cases, including Obus, where the government was not required to prove the tippee's knowledge of a benefit received by the tipper. The government argued that requiring proof that each successive tippee knew the insider benefitted would allow tippees who knew of the insider's breach of duty—but not the benefit obtained by the insider—to escape liability.''11

On appeal, the Second Circuit accepted Newman's and Chiasson's arguments, holding that ''in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information in exchange for a personal benefit.''12 The court explained that under Dirks, the tipper's breach of a fiduciary duty triggers insider trading liability. That breach is established by showing the benefit received by the tipper. Therefore, to establish that the tippee knew of the tipper's breach, the government must show that the tippee knew of the personal benefit gained by the tipper. The court rejected the government's position that ''liability may be imposed upon a defendant based only on knowledge of a breach of the duty of confidentiality,'' remarking that it is easy to envision an instance in which a trader received a tip, but was unaware his conduct was illegal.

The court questioned the Government's recent practice, which it characterized as a ''doctrinal novelty'' of prosecuting remote tippees, explaining that it was not aware of ''a single case in which tippees as remote as Newman and Chiasson have been held criminally liable for insider trading.'' Importantly, the court set forth a high evidentiary burden for the government to prove a tippee's knowledge of the benefit obtained by a tipper. It held that without direct proof of a tippee's knowledge of a benefit to the tipper, such knowledge may not be inferred by virtue of a personal relationship between the tipper and tippee ''absent proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of pecuniary or similarly valuable nature.'' In Newman's and Chiasson's cases, ''career advice'' between a tippee and tipper higher up the tipping chain was insufficient to satisfy this burden.

The Future of Insider Trading Prosecutions Against Remote Tippees

It is reasonable to expect that the Second Circuit's opinion will give pause to those prosecutors and regulators who were previously inclined to prosecute remote tippees of inside information. Newman's explicit requirement to prove that a tippee knew of the tipper's benefit and its high evidentiary burden for demonstrating that knowledge will make such prosecutions difficult. Indeed, short of a wiretap or a complicit cooperating informant, it is difficult to conceive of what types of evidence would be sufficient to establish knowledge of the tipper's benefit with respect to a tippee who was four or five degrees removed from the original source, as was the case with Chiasson and Newman.

Given the lower burden of proof in civil cases, Newman may not preclude the SEC from bringing charges against downstream tippees in administrative and civil cases. Nonetheless, after Newman, the SEC will need to prove by a preponderance of the evidence that tippees knew of the benefit received by tippers, a fact the SEC has previously argued it need not establish. Certainly this new burden will at the very least change the SEC's calculus about charging tippees. Consider, for example, the SEC's 2014 announcement that it was charging six individuals involved in insider trading in advance of GSI Commerce's acquisition by eBay.13 Three of the six individuals charged in that matter were third or fourth degree tippees, with each of whom the SEC settled charges in administrative proceedings. The cease-anddesist orders against the downstream tippees lack facts demonstrating that the tippees knew of the benefit to the original tippers. It is questionable whether given the burden set forth in Newman, the SEC would still be able to extract settlements from those third and fourth degree tippees. Interestingly, the SEC entered into its first non-prosecution agreement with one fourth degree tippee—possibly in recognition that it would have had difficulty proving that tippee's knowledge of a breach of duty.


The Second Circuit's statement in dicta that ''nothing in the law requires a symmetry of information in the nation's securities markets'' seems like a shot across the bow of prosecutors and regulators who—at least according to the defense bar—have been increasingly aggressive in pursuing insider trading cases against remote tippees in recent years. Time will tell if they heed the court's warning.


1 463 U.S. 646 (1983).

2 Id. at 662.

3 See, e.g., United States v. Whitman, 904 F. Supp. 2d 363 (S.D.N.Y. 2012); United States v. Rajaratanam, 802 F. Supp. 2d 491 (S.D.N.Y. 2011); State Teachers Ret. Bd. v. Fluor Corp., 592 F. Supp. 592 (S.D.N.Y. 1984).

4 See, e.g., United States v. Jiau, 734 F.3d 147 (2d Cir. 2013); United States v. Libera, 989 F.2d 596 (2d Cir. 1993).

5 693 F.3d 276 (2d Cir. 2012).

6 Id. at 284.

7 Id. at 293.

8 Whitman, 904 F. Supp. 2d at 371.

9 Id. at 372.

10 United States v. Newman, Brief for Appellant-Defendant Anthony Chiasson at 50, No. 13-1837 (2d Cir., Aug. 15, 2013).

11 United States v. Newman, Brief for the United States of America at 56-57, No. 13-1837 (2d Cir., Nov. 14, 2013).

12 United States v. Newman, Nos. 13-1837, 13-1917 (2d Cir. Dec. 10, 2014).

13 See U.S. SEC. & EXCH. COMM'N, SEC Charges Six Individuals With Insider Trading in Stock of E-Commerce Company Prior to Acquisition by eBay (Apr. 25, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541642140#.VIizNNLF-nk .


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