Insider Trading Re-booted

The Second Circuit on Monday made insider trading a lot more risky by permitting the government to assert a criminal complaint against a tipper without showing that the tipper received personal benefit by reason of providing the tip.

Over the past couple of decades, the courts had grafted a requirement to show some benefit to the tipper in order to create liability when relying on the ’34 Act, setting off a series of confusing cases wherein the effort to define the requisite benefit became increasingly esoteric– receipt of money was easy, but what about gifts, or situations where benefits were inherent in close personal relationships.

The Second Circuit permitted a conviction to stand without even addressing the question of personal benefit by utilizing a different statute, Section 1348 of Title 18, which addresses securities fraud in general. See US v Blaszczak.

Note that neither the ’34 Act nor the text of Title 18 mentions the words “tipper” or “tipee” or “tipping.” There is a House bill that would address tipping directly, although it is too early to tell if anything will pass Congress and whether any such Act would adopt or reject the “benefits” requirement.

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