US v. Newman and the Rewriting of the Law of Insider Trading (Part 11)

The main issue in the case was the court’s view of benefit.  The case did not, apparently, turn on allegations that the tippers received a pecuniary gain from disclosing the inforomation.  Instead, the government argued that there was sufficient evidence of friendship.  The court found the evidence of friendship to be inadequate.

• The circumstantial evidence in this case was simply too thin to warrant the inference that the corporate insiders received any personal benefit in exchange for their tips.  As to the Dell tips, the Government established that Goyal and Ray were not “close” friends, but had known each other for years, having both attended business school and worked at Dell together. Further, Ray, who wanted to become a Wall Street analyst like Goyal, sought career advice and assistance from Goyal. The evidence further showed that Goyal advised Ray on a range of topics, from discussing the qualifying examination in order to become a financial analyst to editing Ray’s résumé and sending it to a Wall Street recruiter, and that some of this assistance began before Ray began to provide tips about Dell’s earnings.   The evidence also established that Lim and Choi were “family friends” that had met through church and occasionally socialized together.  The Government argues that these facts were sufficient to prove that the tippers derived some benefit from the tip.   

To the extent that this evidence was sufficient, the court reasoned, “practically anything would qualify.” 

In addition, however, the court reasoned that evidence of friendship, standing alone, was not enough. In addition to friendship, there had to be an inference that the tip of non-public information provided "at least a potential gain of a pecuniary or similarly valuable nature.” 

• This standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature. If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity. To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee's trades “resemble trading by the insider himself followed by a gift of the profits to the recipient,” see , we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. 

Moreover, the “benefits” that were alleged to have occurred were deemed not to be significant.  “Career advice” was characterized as “little more than the encouragement one would generally expect of a fellow alumnus or casual acquaintance.”  Id.  (“Crucially, Goyal testified that he would have given Ray advice without receiving information because he routinely did so for industry colleagues.”).  As for inferring that the inside information was provided in return for the career advice, the Second Circuit panel found that the insider “disavowed that any such quid pro quo existed” and that the evidence showed that the career advice had begun before insider information had been provided.  

With respect to Newman, the decision and the request for rehearing en banc is posted, along with the SEC’s amicus brief, at the DU Corporate Governance web site.  The amicus filed by a small group of law professors that supports the decision is here.