You’re only guilty of criminal insider trading, in America,1 if:
- you trade on information that is material and nonpublic, and
- some other stuff.
The other stuff is mostly stuff that only a lawyer could love, but man do they love it. It consists most importantly of the rule that the person who gives you the material nonpublic information needs to have done so in breach of some duty to keep the information secret and in order to get some personal benefit for himself. If a stranger just wanders up to you and says “I’m the CEO of Smerbafife and it’s a giant fraud, gotta go,” and you trade on that: you’re probably good.
This doesn’t help very often, though, since the personal benefit for the tipper doesn’t have to be an explicit bribe, or an explicit anything; just a desire to spice up your friendship with some material nonpublic information can qualify.2 (Also: usually there are bribes. You start with casual venting of frustrations and the next thing you know you’re accepting bags of cash in parking lots.)
It might help Anthony Chiasson and Todd Newman though:
Level Global Investors LP co-founder Anthony Chiasson and former Diamondback Capital Management LLC portfolio manager Todd Newman, sentenced to prison for insider trading, can remain free while they fight their convictions, an appeals court ruled. … Lawyers for both men today told a federal appeals court in New York that their clients should remain free because there is a “substantial question” of law to be decided in the case. Both fund managers said U.S. District Judge Richard Sullivan, who presided over their case, issued a ruling during the trial that made it easier for the government to prove culpability for insider trading.
The defense lawyers argued that two other federal judges in Manhattan have ruled differently than Sullivan in securities fraud cases, concluding that the recipient of a tip isn’t liable for insider trading unless he knew the person who provided the illegal information did so for a personal benefit.
The fact that the appeals court granted bail from the bench suggests that they take this argument pretty seriously. If they ultimately agree when they hear the appeal, then the jury in the Chiasson and Newman trial were instructed incorrectly about what the government needed to prove, which probably means that Chiasson and Newman would get a new trial, and a chance to prove that while they knew they were trading on inside information, they didn’t know that the people who got them the inside information had paid the tippers for it. Or, like, had a friendship with the tipper that the tipper wanted to maintain, or whatever:
Their lawyers maintain that to be convicted of insider trading, Mr. Chiasson and Mr. Newman were required to know that the insiders — an employee at Dell and an employee at Nvidia — leaked the confidential information in exchange for a personal benefit. And because both were so far removed from the information, neither had any knowledge of whether the tippers provided the secret data to benefit themselves, they argued.
Well that would be helpful wouldn’t it? We’ve talked before about the lengthy path that the inside information traveled in the Dell/Nvidia/Diamondback/Level Global/Fight Club/etc. insider trading investigation, and about how best practices for hedge fund managers who want to insider trade might involve setting up an impenetrable wall to keep out whatever inside information their analysts get. But best practices might actually be more like a semi-porous wall:
Imagine the comfort of knowing that you’re trading on material nonpublic information, without the criminal liability of knowing that it was obtained in exchange for a personal benefit to the tipper! And this sort of semi-porous wall is much easier to set up than the impenetrable wall: instead of your analyst coming to you and saying “boss, I got a good feeling about Nvidia, don’t ask me why,” and you having to trust him, your analyst can come to you and say “I have material nonpublic information about Nvidia that I obtained from a company insider.” All he has to do is not go on to say “also I bribed him.” Pretty good, huh?
That’s not quite right. Even the judges who agree with Chiasson and Newman’s lawyers probably wouldn’t endorse the semi-porous wall theory of insider trading in so many words:
In instructing the jury in United States v. Whitman, the Honorable Jed S. Rakoff concluded that the Government must prove that a tippee knew the company insider received some personal benefit in exchange for disclosing confidential information. But, Judge Rakoff clarified, the tippee need not know exactly what that benefit was, and the Government can satisfy its burden of proving knowledge of a personal benefit by showing that the tippee purposefully blinded himself to obtaining actual knowledge about this benefit.
So, a semi-porous wall would be problematic if it took the form of, like, a sign in the hedge fund manager’s office saying “In Here We Don’t Talk About What We’ve Done For Our Sources Of Inside Information.” Still. If you were, say, running a hedge fund in which many independent analysts and portfolio managers did their own research, and you traded on it without keeping a close eye on exactly what they were doing, and what they were doing included a lot of insider trading, you might take yesterday’s ruling as pretty good news.
Under Dirks, the mere disclosure of material, nonpublic information by itself is insufficient to constitute a breach of an insider’s fiduciary duties. The purpose of the disclosure is determinative as to whether a breach has occurred. Because the policy underlying insider trading laws is rooted in stopping the use of inside information for personal gain, an insider does not run afoul of those laws or fiduciary duties to shareholders unless the insider receives a personal benefit. …
“Personal benefit” has been defined expansively, requiring only minimal proof by the government. Proof that the tipper made a gift of information to a trading relative or friend has been found a sufficient benefit to the tipper. In Yun, evidence that the tipper and tippee were friends, worked together as realtors and split commissions on sales was sufficient for a jury reasonably to conclude that the tipper expected to benefit through maintaining a good relationship with the tippee. Similarly, in SEC v. Maio, the court accepted an inference of a personal benefit based solely on the close friendship between the tipper and the tippee, and the “hypothetical benefits” that may have been derived from it.