The Supreme Court expanded insider trading liability by holding that a tippee can be convicted even if the tipper receives no specific pecuniary benefit. In the case, the defendant received the inside information from the brother of the tipper, who worked for an investment bank. The investment banker received no benefit other than the psychic benefit of helping his brother. The defendant asserted the Newman defense, arguing that he could not be prosecuted because he did not receive something of “pecuniary or similarly valuable nature.” The Court rejected that narrow interpretation, instead relying on the pre-Newman Dirks standard, which allows a finding of insider trading where the tipper provided information to a trading relative or friend.
OUR TAKE: This is a big win for federal prosecutors, because it significantly limits the Newman case and allows an inference of personal benefit without proving a specific pecuniary benefit. However, insider trading law remains somewhat murky and fact-specific. For example, what if the tipper provided information to a third cousin, once removed? Would that be close enough of a relationship? Or would Newman apply? Because of this lack of clarity, our advice is to go nowhere near the line. Refrain from trading if you have any suspicion that you have obtained material, nonpublic information.