US v. Newman and the Rewriting of the Law of Insider Trading (Part 12)

The panel's view of benefit was not, however, consistent with Dirks.

Dirks contained two approaches to benefit.  One dealt with disclosure to market participants.  This required some kind of objective benefit.  The second dealt with disclosure to friends and relatives.  This required only the showing of the requisite relationship.  The panel of the Second Circuit found that evidence of a close relationship was not, standing alone, sufficient.  Instead, the tip had to hold the promise of some type of pecuniary or similar gain.  

In doing so, the panel essentially replaced the two standards with a single test based upon pecuniary/objective gain. Indeed, given the need for a pecuniary or similar gain, it is difficult to see the relevance of friendship or family to the analysis.  Moreover, the analysis ignored the difference between disclosure to market participants and to friends/relatives.  The Supreme Court in Dirks sought to protect one but not the other.  Indeed, by using the term "gift", the Court intended to capture disclosures given, as one dictionary put it, "voluntarily without payment in return".

There may have been room to argue for a narrow interepretation of the friendship standard, particularly when applicable to market participants.  But assuming the requisite friendship, Dirks did not leave room for the requirement that the information provide a pecuniary/objective benefit to the tipper.  Such an approach would essentially allow unlimited disclosure of material non-public information among family and friends without triggering the prohibition on insider trading, at least where the tipper received no pecuniary gain/benefit.  This is exactly what Dirks wanted to prevent by articulating the gift standard.   

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.