United States: Watch the Napkin: First Circuit Affirms Insider-Trading Conviction

In what appears to be the first appellate decision since the Supreme Court's December 2016 ruling in Salman v. United States, the U.S. Court of Appeals for the First Circuit affirmed an insider-trading conviction based on a tip of material, nonpublic information. The February 24, 2017 decision in United States v. Bray held that the jury had sufficient evidence to conclude that, in soliciting and receiving a trading tip surreptitiously written on a pub-room napkin, the tippee had known that the tipper had provided the information in breach of his duty of confidentiality and in expectation of a personal benefit.

However, the court also made clear that a tippee cannot be criminally convicted for insider trading if he merely "should have known" of the tipper's breach of duty. The court further held that a "willful blindness" or "conscious avoidance" standard cannot be based on mere negligence (at least in a criminal case).

Factual Background

The Bray case arose out of the relationship between a bank executive (the tipper) and a contractor and real-estate developer (the tippee). The two were members of the same country club and had known each other for 15 years. They often socialized together at the club and elsewhere. The tippee knew the tipper's family and had taken "a particular liking" and provided gifts to the tipper's son. The tipper used some of the tippee's business associates to refurbish his house, and the tippee regularly asked the tipper for trading advice about bank stocks. The tipper routinely answered those questions by providing advice based solely on public information.

However, on one occasion, the tippee told the tipper that he (the tippee) needed to make a "big score" to finance a real-estate project, and he asked the tipper for any "bank stock tips." The tipper again provided some public information, but he also wrote the name of a local bank on a napkin and gave it to the tippee, saying "'[t]his could be a good one,' or at least 'something to that effect.'"

The tipper knew about the local bank because his employer had told him to do due diligence on it as a potential acquisition target, and he had signed an agreement requiring him to keep confidential any nonpublic information he learned. The tipper did not "explicitly" tell the tippee about the confidentiality agreement or the source of his tip. The tippee later offered the tipper a free stake in the real-estate project that he had hoped to finance through the "big score."

The tippee placed large trades in the local bank's stock, which was thinly traded – and which his broker tried to convince him not to buy in such substantial amounts. Approximately two weeks later, the tipper's employer announced an agreement to buy the local bank at almost double the previous day's closing stock price.

The Government prosecuted the tippee under the misappropriation theory of insider trading, which posits that individuals (such as the tipper) who are "entrusted with confidential information about a corporation cannot secretly us[e] such information for their personal advantage even when they do not owe any direct fiduciary duty to [the issuer] or its shareholders." The tippee's liability is derivative of the tipper's. Tippee liability "hinges on whether the tipper breached a duty of trust and confidence by disclosing the inside information, which in turn depends on whether the tipper personally will benefit, directly or indirectly, from [the] disclosure." The tippee inherits the tipper's duty "if the tippee knows the information was disclosed in breach of the tipper's duty."

The jury convicted the tippee of insider trading, and the First Circuit affirmed the conviction, rejecting the tippee's challenges to the sufficiency of the evidence and holding that the jury instructions – although erroneous in certain respects – had not constituted "plain error."

First Circuit's Decision

Sufficiency of the Evidence

The court first held that, based on the evidence at trial, the jury could have concluded that the tipper had given the inside information to the tippee with the purpose of obtaining a personal benefit. Under the Supreme Court's decisions in Dirks v. SEC and Salman v. United States, the personal-benefit element requires the court to "focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings." But "a personal benefit can often be inferred where a relationship between the [tipper] and the recipient . . . suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. . . . A personal benefit can likewise be inferred where a tipper makes a gift of inside information to a trading relative or friend."

In this case, the evidence "showed that it is at least 'plausible' that [the tipper] and [the tippee] had a close relationship." Moreover, the tipper had testified that, in giving the tip, he had "'figured [the tip] would enhance' his reputation with [the tippee]." A reasonable jury could therefore have inferred that the tipper had "expected a benefit down the road" – and he in fact received one, when the tippee later offered him a free stake in the real-estate project.

The court further concluded that a reasonable jury could have found that the tippee had known that the tipper had tipped him in expectation of a personal benefit. The pair's "close relationship" could have led the jury to infer that the tipper had intended to benefit the tippee, and the tippee's two offers of a free stake in the real-estate project could have bolstered that conclusion. A reasonable jury could also have concluded that the tippee had known of the tipper's breach of his duty of confidentiality:  the tippee had known "what the tipper did for a living" and had been aware that the tipper had surreptitiously provided the inside information in response to the tippee's request for "a 'tip' on which he could make a 'big score.'"

Jury Instructions

The tippee fared somewhat better with his challenges to the jury instructions.

First, the appellate court held that the District Court had "clearly erred" by instructing the jury that it could convict the tippee if it found that he "'knew or . . . should have known' that [the tipper] had breached a duty of confidentiality by giving him the [bank] tip." A "should have known" standard – which can be negligence-based – is inconsistent with the state of mind required for criminal liability.

Second, the First Circuit found clear error in the jury instruction equating "willful blindness" with negligence. The willful-blindness standard allows imposition of criminal liability "on people who, recognizing the likelihood of wrongdoing, nonetheless consciously refuse to take basic investigatory steps." A negligence standard is inconsistent with a requirement of conscious and deliberate avoidance of knowledge.

However, the First Circuit ultimately affirmed the conviction despite the erroneous jury instructions because the tippee had not objected to them at trial and was unable to prevail under the rigorous "plain error" standard of appellate review.

What the Court Did Not Decide

The Bray  decision flagged several potentially important issues that the court did not resolve – and that will undoubtedly continue to arise in insider-trading cases.

First, the First Circuit did not decide whether the personal-benefit requirement – which was developed in classical-theory insider-trading cases (involving breaches of duty by the issuer's insiders) – also applies to misappropriation-theory cases such as this one. The court saw no need to resolve the issue because the record contained evidence that the tipper-misappropriator had expected a personal benefit in exchange for disclosing material, nonpublic information.

Second, the First Circuit did not decide whether a personal benefit can be inferred in the absence of a quid pro quo or some other objective, consequential exchange if the tipper and the tippee did not share a "meaningfully close personal relationship." The Supreme Court's Salman decision had not addressed that issue because the tipper and the initial tippee in that case were brothers. The First Circuit saw no need to decide that question, either, because "the record's evidence of [the tipper's] and [the tippee's] friendship, coupled with [the tipper's] testimony that the tip might lead to certain future benefits, provided a sufficient basis for a reasonable jury to conclude that [the tipper] had acted in expectation of a personal benefit." This issue – the interconnection (if any) between the nature of the tipper's and the tippee's personal relationship and the tangibility of the tipper's personal benefit – will likely remain a battleground in insider-trading cases.

Third, the First Circuit did not decide whether a tippee must actually know (at least in a criminal case) that the tipper disclosed confidential information in exchange for a personal benefit, or whether some lesser degree of awareness might suffice. The Supreme Court had expressly declined to address that issue in Salman, and the parties in Bray had assumed that a knowledge standard applied. The First Circuit found the issue to be "of no consequence" because the jury could reasonably have concluded that the tippee had possessed the requisite knowledge even under the most stringent standard.

Watch the Napkin: First Circuit Affirms Insider-Trading Conviction

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