In United States v. Newman, the United States Court of Appeals for the Second Circuit imposed a new and narrowed standard for establishing a remote tippee’s knowledge and a corporate insider’s personal benefit for purposes of insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b–5. This Casenote analyzes the Newman decision and contemplates its potential impact on tippee liability in insider trading cases. The Author begins by explaining the history of tippee liability prior to Newman and discussing the Second Circuit’s justifications for gradually narrowing the knowledge standard and deviating from insider trading precedent. The Author then examines the Newman decision, observing that the court held a tippee must actually know of the insider’s breach of a fiduciary duty to be liable for insider trading, which is in contrast with prior caselaw that imposed liability on tippees who should have known of the insider’s breach of a fiduciary duty. Further, the Author notes that the Second Circuit blurred the definition of what suffices as a “personal benefit” to the insider and imposed an ambiguous “meaningfully close” standard that was not grounded in precedent.
The Author argues that the knowledge and personal benefit standards for tippee liability established inNewman significantly hinder the government’s ability to prosecute tippees. This effect undermines public policy and threatens the public’s confidence in markets and investment activities. To promote more effective securities laws, the Author proposes recommendations for a less cumbersome analysis of tippee liability by examining comparable federal antifraud measures, international law, and existing theories of insider trading. The Author concludes by suggesting that the scrutiny of tippee liability cases should focus on whether information was obtained to gain an unfair advantage, and predicting that this focus will simplify the analysis, add predictability to securities laws, and help stabilize markets for investors and the public.