Insider Trading: Is Stewart the Way Forward for the Government?

The Government’s insider trading conviction last week in U.S.v. Stewart, No. 1:15-cr-00287 (S.D.N.Y.) is being hailed by some as the way forward for the DOJ and the SEC in a post-Newman world. Perhaps. But consideration of the jury instructions in view of the arguments being presented to the Supreme Court in Salman, which will be heard in the October Term of the High Court, does not necessarily confirm that view.


The case is a family affair. It centers on the tipping of father Robert Stewart by son Sean Stewart. The son was employed at two different investment banks between 2010 and 2014. During that period he furnished material non-public information regarding pending deals that he obtained through his employment to his father who profitably traded. After the first transaction FINRA began an inquiry.

The trading continued, according to the facts detailed in the SEC’s parallel action. At one point father Robert began trading through the account of another with whom he shared profits. During the scheme the two men also talked in code at times in order to try and avoid detection. Father Robert had over $1 million in trading profits. Son Sean gifted the information to his father. Father Robert became an insider with an obligation not to trade, according to the SEC.

Son Sean pleaded guilty. Father Robert went to trial and was convicted of insider trading last week. One critical issue was the Dirks personal benefit which is the predicate for a breach of duty under that decision. The court in Steward instructed the jury that the Government must prove that “Mr. Stewart, in providing this [inside] information so that his father could trade on it, anticipated receiving a personal benefit in return . . .”

The court went on to state that “the Government must prove beyond a reasonable doubt that Mr. Stewart anticipated receiving a personal benefit in return for providing material non-public information to his father. Personal benefit is broadly defined to include pecuniary gain, as well as the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend. However, the personal benefit received in exchange for confidential information must be of some consequence. Although the receipt of personal benefit may be inferred from the personal relationship between Mr. Stewart and his father, you may only draw this inference if you find that there was an exchange between them that was objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

Arguments in Salman

The instructions given in Stewart appear to fall in between the arguments being advanced in Salman. Petitioner-defendant argues that Dirks drew a line in the sand, defining illegal tipping to be based on a breach of duty coupled with obtaining a personal benefit. The test for assessing whether the benefit meets the Dirks test, according to Petitioners, is if it is an objective one in keeping with the notion of establishing a guiding principle. The focus is on pecuniary gain or a reputational benefit that will translate into future earnings. Examples include cash, reciprocal information, or other things of value. The benefit, according to Petitioner, is synonymous with gain and profit in the nature of a quid pro quo. The fraud thus turns on the insider’s pecuniary motive.

The Government disagrees. Dirks did in fact hold that for there to be a breach of duty the tipper must obtain a personal benefit. That benefit can be pecuniary. It may also be a gift which serves a personal purpose. If the objective facts show that the information was provided as a gift for securities trading and there no other corporate purpose for the disclosure, the personal benefit test is satisfied.

The instructions in Stewart appear fall in a grey area between the two arguments. The instruction does not require a pecuniary benefit as Petitioner in Salman argues. At the same time the Stewart instruction does not require the Government to prove that in addition to being a gift there was no other corporate purpose for the disclosure as it argues in Salman. Thus whether Stewart is in fact the way forward for the Government will, apparently, have to await another day.

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