SEC Civil Insider Trading Case Proceeds Despite Newman Ruling
Ever since the Second Circuit overturned the insider trading convictions of two former hedge fund managers in United States v. Newman, there has been considerable debate about how difficult it may be for the SEC to move forward with insider trading cases. On Monday, U.S. District Judge Jed Rakoff allowed a civil insider trading suit filed by the SEC to proceed, suggesting that Newman may not present a substantial hurdle, at least at the motion to dismiss stage. In SEC v. Payton, the court held that the SEC’s complaint had adequately alleged that the tipper of material nonpublic information had received a personal benefit for the disclosure and that the remote tippees had had sufficient knowledge of that benefit under the “recklessness” standard applicable to civil cases. Judge Rakoff found that, to establish the personal-benefit requirement established by Newman, a “close, mutually dependent financial relationship” between tipper and tippee is sufficient. According to The New York Times, “Under this approach, [Newman] should not present much of a hurdle for the SEC if it can demonstrate evidence of a benefit that appears to be of some reasonable value and a relationship that goes beyond a work friendship or being golf buddies.” In Newman, the Second Circuit set a new standard for the “personal benefit” element for tippee liability, holding that “in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.” Previously, courts had used a low standard for showing the insider’s personal benefit, allowing it to be inferred from circumstances such as mere friendship and not requiring the tippee’s knowledge of the benefit. The more demanding standard set by the Second Circuit requires that the tipper receive “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” Read more in The New York Times.