Government Seeks Rehearing In Landmark Insider-Trading Case

The U.S. Government filed a petition seeking panel and en banc rehearing of the Second Circuit's December 2014 decision in United States v. Newman and Chiasson, ___ F.3d ___, 2014 WL 6911278 (2d Cir. Dec. 10, 2014). That highly publicized decision – about which we blogged here – overturned insider-trading convictions of two remote tippees by (i) holding that a tippee must know that the insider tipper received a personal benefit for providing the tip and (ii) clarifying or narrowing (depending on one's interpretation) the definition of what constitutes an actionable personal benefit.

The Government's rehearing petition, filed on January 23, 2015, makes a relatively surgical strike at the panel's decision. Although the Government disagreed at trial and on appeal with the defendants' contention that a tippee must know that the insider tipper received a personal benefit, the Government chose not to seek rehearing of the panel's holding that such knowledge is required and that the trial court had therefore erred in not including that element in its jury instructions. Instead, the rehearing petition focuses primarily on what the Government contends was an erroneous restriction of the nature of that personal benefit. The Government also argues that the panel erred by vacating the defendants' convictions and remanding for dismissal of the indictments, instead of remanding for a new trial under different jury instructions.

The Government's Argument About Personal Benefit

The Newman decision held that a corporate insider entrusted with a fiduciary duty does not breach that duty by disclosing confidential information to a tippee unless he or she does so "in exchange for a personal benefit." The court ruled that such a personal benefit does not exist unless the disclosure was for a pecuniary gain or was part of "a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. . . . [T]his requires evidence of 'a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].'"

The rehearing petition argues that this "'exchange'-based, pecuniary limitation on what constitutes a personal benefit" is inconsistent with the Supreme Court's decision in Dirks v. SEC, 463 U.S. 646 (1983), and conflicts with decisions of other Circuit Courts. The Supreme Court held...