In United States v. Newman,1 the U.S. Court of Appeals for the Second Circuit will likely answer a question that has divided courts in insider trading cases: whether, under the so-called “classical” theory of insider trading—in which a corporate insider breaches a duty owed to shareholders not to trade on material, nonpublic information or disclose such information to others who trade based on it—a tippee must have knowledge of the personal benefit the tipper derived from the scheme. As discussed below, this question ultimately turns on whether the tipper’s personal benefit is what constitutes the breach of fiduciary duty by the tipper, or whether it is a separate element of the offense altogether. To answer that question, the court will have to resolve seemingly conflicting lines of precedent from cases that have arisen not only under the classical theory but also under the “misappropriation” theory of insider trading, in which an outsider who has been entrusted with material, nonpublic information breaches a duty owed to the source of that information by trading on it or disclosing it to others who trade.
Court-watchers have suggested that the panel in Newman expressed skepticism at oral argument towards the government’s position that it was required to prove only that the tipper had received a personal benefit, but not that the tippee had knowledge of this benefit. If the court does rule that knowledge of the tipper’s benefit is required to prove the tippee’s guilt, questions will likely remain as district courts consider how to apply such a requirement in the future.
