By: Mark Tarallo
In a decision dated December 10, 2014, the Second Circuit Court of Appeals clarified its position on insider trading cases where the discloser of the information committed no crime. In US v. Newman, the Court addressed a situation where the defendants, who were several “degrees” removed from the discloser of the information, received the information without any knowledge as to the criminal liability of the discloser. The Court ruled that since the defendants did not know that the discloser committed a crime, then the defendants cannot be guilty of a criminal act, stating in part “we find no support for the Government’s contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability.” The Court then went on to lay out a clear statement of the requirements for an insider trading case:
In sum, we hold that to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.
The Court reversed the lower court’s guilty finding, and ordered a finding of not guilty. In addition to clearly setting out the standards for an insider trading case, the case serves as a reminder to all public companies that they should incorporate robust protections to ensure against even the inadvertent disclosure of confidential, non-public information.
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