Insider Trading

Yesterday, the Obama administration asked the Supreme Court to review the Second Circuit’s insider-trading decision, Newman, from earlier this year.  Insider trading is a fraud-based crime, meaning that there needs to be a breach of duty for liability to attach.  The main question presented by Newman is when does liability attach when material information is passed along a network of contacts, often referred to as tipper-tippee liability. In simplest terms, liability under such a scenario attaches when the person receiving the information (the tippee)  knows that the person disclosing the information (the tipper) is violating a duty AND a benefit flows from the tippee to the tipper. 

There were two questions presented by Newman.  First, does every tippee in the network need to know about the original tipper’s breach of the duty. Second, what constitutes a benefit. The government has argued that benefit can be money and also intangible concepts like increased social standing or friendship. The Newman court held that to prove insider trading the government must establish that every tippee knew that the original tipper was violating a duty and the benefit must be consequential, although not necessarily financial, and rejected ephemeral concepts like friendship as a benefit, at least for purposes of insider trading. These are the two points that the administration has asked the SCOTUS to review. It is unclear at the time of publication whether SCOTUS will accept the case for arguments.  I’m not a Court watcher but I strongly suspect it will take the case.

Finally, to all of the attorneys and aspiring attorneys on here, let’s agree to let any minor legal mistakes in the write-up slide for this week.

mountebank

 a person who deceives others, especially in order to trick them out of their money; a charlatan.

 historical

a person who sold patent medicines in public places.

Origin "a doctor that mounts a bench in the market, and boasts his infallible remedies and cures" [Johnson], 1570s, from Italian montambanco, contraction of monta in banco "quack, juggler," literally "mount on bench" (to be seen by crowd), from monta, imperative of montare "to mount" (see mount (v.)) + banco, variant of banca "bench" (see bank (n.2)). Figurative and extended senses from 1580s.