On December 10, the press reported the Second Circuit's decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case).  In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., "knew that the insider disclosed confidential information in exchange for a personal benefit").  The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:

[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.

For devotees of the Supreme Court's opinion in Dirks v. SEC, the court's legal conclusion should be unsurprising.  Specifically, the Dirks Court stated that "a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach."

In the five days since the Second Circuit's opinion was released, a number of our colleagues already have written interesting substantive news articles and blog posts about the decision.  To highlight a few:

• Peter Henning wrote an early piece summarizing the case as a whole in an insightful fashion.
• Michael Perino has written an interesting piece that highlights the part of the opinion in which the court finds that friendship between a tipper and tippee is not always sufficient to make out a case for personal benefit. 
• Steve Bainbridge has posted a summary of the decision–quoting from it and his earlier post on the case–and decrying the prosecutorial discretion (or, really the lack thereof) of Preet Bharara, U.S. Attorney  for the Southern District of New York.

While Steve's post (entitled "US v Newman: A big win for coherence and fairness in insider trading law") and other commentary note the role of the case in adding some clarity to the doctrine (and it certainly does do that), the core of the doctrine is built on shaky ground and belies a deep ambivalence or uncertainty that U.S. policy-makers have about what we desire and intend to punish when we punish insider trading violations.  I wrote a bit about this in a recent essay.  

Because the doctrinal "hook" for penalizing insider trading is a special type of deception (judicially created and still primarily judicially recognized) that constitutes securities fraud under the vaguely worded, non-self-actualizing Section 10(b) of the Securities Exchange Act of 1934, as amended, the existence of a breach of duty has become central to the analysis.  Yet, many would say (and many would push back on this argument, too) that the specific and general deterrent effect of the doctrine is weakened by its complexity, and that it would be clearer to go the way of many other countries' insider trading prohibitions and make any trading while in possession of material nonpublic information unlawful.  Those who push back against this fairness-based rule make the nice point that a rule of this kind stifles informational entrepreneurialism–which just seems so American (like baseball, hot dogs, apple pie, etc.) and is a foundation for the Dirks opinion.  I note the latter point in my essay ("The tippee liability rule in Dirks derives in large part from a desire to protect the entrepreneurial hunt for information in connection with securities trading transactions.") and cite to the relevant portion of the Dirks opinion.

So, while a modicum of clarity, coherence, and fairness has been added to U.S. insider trading doctrine by the Newman opinion, we still have a ways to go in maximizing the possible effects of our insider trading law as a means of effectuating investor protection and fair securities markets in which investors unhesitatingly and consistently desire to participate.  In other words, without a clear signalling effect, U.S. insider trading law will not reach its U.S. securities regulation potential.