USAO Wants Newman Insider Trading Case Reheard

The Second Circuit’s decision in U.S. v. Newman, Nos. 13-1837-cr. 13-1917-cr (2nd Cir. Dec. 10, 2014) continues to be the key focus in insider trading cases. There the Court held that remote tippees must not only know that the information was transmitted in breach of a duty under the classic theory of insider trading but also that the tipper received a personal benefit that was in the nature of a quid pro quo. The Court reversed and dismissed the convictions of two hedge fund executives because the jury instructions failed to inform the jury that the tippees had to know about the personal benefit and, in any event, the evidence on the point was insufficient (here). As the week drew to a close another judge in Manhattan vacated the guilty pleas of four individuals who were down stream tippees in the IBM take-over case based on Newman. U.S. v Conradt, No. 12 Cr. 887 (S.D.N.Y.). In opposing that motion the Government argued that the personal benefit test only applied to insider trading based on the classic theory, not the misappropriation theory (here).

The Petition

Now the Government has requested rehearing in the Newman case and rehearing en banc. Petition of the United States of America For Rehearing and Rehearing En Banc in U.S. v. Newman, No. 13-1837, 13-1917 (2nd Cir. Filed January 23, 2015). In its petition the Government argues two key points: First, that the panel decision redefines “personal benefit” in a manner which is contrary to Dirks v. SEC, 436 U.S. 646 (1983). Second, that in applying this “new and incorrect definition of personal benefit . . . the panel erroneously ordered dismissal of the charges . . .” Although the Government asserts in the Petition that the jury instructions were correct despite the fact that they did not require that the defendants know the tipper received a personal benefit, the point was not raised — “a requirement the Government argued against, but does not challenge herein . . .” as the Petition states.

Initially, the Petition argues that Newman constricts the definition of the personal benefit test in a manner which is directly contrary to Dirks. Under that decision the insider violates the duty owed to his or her company in “a way that violates the federal securities laws when he discloses inside corporate information for an improper purpose – that is, for a personal benefit rather than a corporate purpose,” the Government noted. The personal benefit under Dirks may be “direct or indirect” and can take a variety of forms. While there may be a quid pro quo, there may also be an intention to benefit a particular individual. The critical point is that “’[t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient,’” the Government argued, quoting Dirks.

In this case the panel took a very different approach, the Government claims. It took the gift language from Dirks and added an “unprecedented limitation that effectively upended Dirks: ‘To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee,’ the Panel held, ‘such an inference is permissible in the absence of proof of a meaningfully close relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” This is “flatly inconsistent” with Dirks, according to the Government. Under the Supreme Court’s decision a gift is enough. Here the Panel not only “nullified part of the Dirks personal benefit test – apparently eliminating Dirks’s express recognition that an improper but uncompensated gift of information by an insider suffices – but, citing no authority, replaced it with a set of novel, confounding criteria for the type of ‘exchange’ that will now be required . . .”

Second, the evidence “under a proper ‘personal benefit’ instruction (such as the one suggested by the parties and given by the District Court), the evidence amply supported the jury’s conclusion that the Dell and NVIDIA insiders disclosed secret corporate information for personal benefit” the Government contends. At the same time the defendants “knew or consciously avoided knowing that the insider-tippers acted for a personal benefit.” Accordingly, once it was determined that the jury instructions were erroneous, the Panel should have vacated the convictions and remanded for retrial.

Finally, the Government contends that the new definition of “personal benefit” threatens the integrity of the securities markets. Indeed, the “Panel’s ambiguous and diluted notion of when an insider ‘personally benefits’ from disclosure of inside information not only conflicts with Supreme Court precedent, but also invites selective leaking of valuable information to favored friends and associates of well-placed corporate insiders.” This will undermine confidence in the securities markets.


The Government’s argument is based almost exclusively on Dirks, although it does cited decisions from other circuits. Notably absent from the cases cited by the Government is the Second Circuit’s decision in SEC v. Obus, No. 10-4749 (2nd Cir. Sept. 6, 2012). There the Court not only applied the Dirks personal benefit test but held that the tippee must know of the breach of duty and the personal benefit. Yet the Government successfully argued in the District Court that the jury need not find that the tippee knew of the personal benefit. Accordingly, this point was omitted from the jury instructions. As a result the Newman Court held that the jury instructions were erroneous because they did not follow Dirks and Obus.

Now, however, the Government seeks shelter under Dirks. There is no doubt that the Supreme Court crafted the personal benefit test for the same reasons as the Panel in Newman returned to it. The Dirks Court sought to draw a bright line between prohibited insider trading and other disclosures of corporate information. The Newman panel recognized this point in resurrecting the a test which had become a largely perfunctory test. By restoring the personal benefit test to the bright line it was intended to be, the Court returned to the true meaning of Dirks.

Finally, the Government’s reliance on policy points regarding the difficulty of proof under the Panel decision is more than inappropriate. It serves to highlight the convoluted morass that insider trading law has become where elements are added, subtracted, defined and redefined in the courts rather than in Congress with criminal liability, years in prison, or at a minimum, in an SEC case, order barring the person from his or her profession for life, hang in the balance – all because the Government overreached in the beginning.

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