Second Circuit Ruling Sets New Precedent for Insider Trading Liability
An experienced lawyer, Ralph Ferrara serves within the securities litigation practice of Proskauer. The international legal publication The Best Lawyers in America named him a leading U.S. lawyer in nine categories. In addition, he is among the inaugural honorees of the Securities Docket’s Enforcement Hall of Fame. Mr. Ferrara has also appeared in numerous legal journals. He has written extensively on topics related to securities litigation and regulation. Recently, Mr. Ferrara published a client alert regarding a new precedent in insider trading litigation. The Second Circuit recently overruled the insider trading convictions of Todd Newman and Anthony Chiasson, presenting significant implications for future insider trading cases and clarifying multiple elements of tippee liability. The Court for the Southern District of New York previously convicted the two hedge fund managers of insider trading following government allegations that they had received inside corporate tips from investment analysts. The Second Circuit reversed this ruling, citing insufficient evidence to prove that the defendants knew that insiders had disclosed confidential information and personally benefitted. Based on the appellate decision in United States v. Newman, the tippee, or person receiving the information, must know that the initial tipper violated a fiduciary duty by disclosing nonpublic information in order to be held liable. The tippee must also know that the tipper received a personal benefit for sharing said information. This “personal benefit” must be objective and consequential, and must present a monetary or similar gain. Additionally, the simple fact of a casual or social friendship does not qualify as a “personal benefit.”