Student: Stanley

United States v. Newman


Prior to beginning work on this discussion,

The five ethical theories we will highlight are rights theory, justice theory, utilitarianism, shareholder theory, and virtue theory.

Suppose a manufacturing facility emits into the air a chemical that it has reason to believe is inadequately regulated by the EPA and that poses a significant threat to nearby residents even at levels lower than permitted by the EPA. As manager of the facility, would you be satisfied to meet the EPA required level or would you install the additional controls you believe necessary to achieve a reasonably safe level? Keep in mind that installing these controls would be expensive and you can anticipate resistance from corporate executives as well as shareholders. Explain why or why not. Support your answer with one or more of the ethical theories (The five ethical theories we will highlight are rights theory, justice theory, utilitarianism, shareholder theory, and virtue theory).

Your initial response should be a minimum of 250 words.


Prior to beginning work on this discussion,

Review the summary of United States v. Newman, 773 F.3d 438 (2d Cir. 2014) in Chapter 45 of the course textbook

Assume Ken Hastings (cookout host) and Tim Daniels (Ken’s tennis partner) both bought stock in New World Industries as soon as the market opened on Monday and all profited 30% after the press announcement by Mrs. Chen. Pursuant to their agreement, Tim Daniels paid Ken Hasting 5% of the profit he made on the transaction.

  • With regard to Judith Chen, Steve Chen, Ken Hastings and Tim Daniels, which of these parties could be considered an “insider” under rule 10(b)(5) of the Securities Act of 1934? Explain why or why not.
  • Which of these parties could have tipper or tippee liability in this case?
  • Did Judith Chen’s actions in telling her husband about the settlement breach her fiduciary duty?
  • Who actually obtained a personal benefit from the tip and how?

Your initial response should be a minimum of 250 words.

In the following case, United States v. Newman, the court used the formula set out in the U.S. Supreme Court case of Dirks v. SEC to determine tippee liability. The court ultimately held that there was no personal benefit received by the tippers, and thus there could be no tipper liability from which purported tippee liability would derive.

United States v. Newman

773 F.3d 438 (2d Cir. 2014)

This case arises from the government’s ongoing investigation into suspected insider trading activity at hedge funds. On January 18, 2012, the government unsealed charges against Newman, Chiasson, and several other investment professionals. On February 7, 2012, a grand jury returned an indictment.

At trial, the government presented evidence that a group of financial analysts exchanged information they obtained from company insiders, both directly and more often indirectly. Specifically, the government alleged that these analysts received information from insiders at Dell and NVIDIA, disclosing those companies’ earnings numbers before they were publicly released in Dell’s May 2008 and August 2008 earnings announcements and NVIDIA’s May 2008 earnings announcement. These analysts then passed the inside information to their portfolio managers, including Newman and Chiasson, who, in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.

Newman and Chiasson were several steps removed from the corporate insiders, and there was no evidence that either was aware of the source of the inside information. However, the government charged that Newman and Chiasson were criminally liable for insider trading because, as sophisticated traders, they must have known that information was disclosed by insiders in breach of a fiduciary duty and not for any legitimate corporate purpose.

At the close of evidence, Newman and Chiasson moved for a judgment of acquittal, arguing that there was no evidence that the corporate insiders provided inside information in exchange for a personal benefit, which is required to establish tipper liability under Dirks v. SEC, 463 U.S. 646 (1983). Newman and Chiasson also argued that, even if the corporate insiders had received a personal benefit in exchange for the inside information, there was no evidence that they knew about any such benefit. Absent such knowledge, appellants argued, they were not aware of, or participants in, the tippers’ fraudulent breaches of fiduciary duties to Dell or NVIDIA and could not be convicted of insider trading under Dirks. In the alternative, appellants requested that the court instruct the jury that it must find that Newman and Chiasson knew that the corporate insiders had disclosed confidential information for personal benefit in order to find them guilty. However, the district court did not give Newman and Chiasson’s proposed jury instruction. On December 17, 2012, the jury returned a verdict of guilty on all counts.


Parker, Judge

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. The insider trading case law is not confined to insiders or misappropriators who trade for their own accounts. Courts have expanded insider trading liability to reach situations where the insider or misappropriator in possession of material nonpublic information (“the tipper”) does not himself trade but discloses the information to an outsider (a “tippee”) who then trades on the basis of the information before it is publicly disclosed. See Dirks, 463 U.S. at 659. The elements of tipping liability are the same, regardless of whether the tipper’s duty arises under the “classical” or the “misappropriation” theory.

The United States Supreme Court was quite clear in Dirks of what is required to demonstrate tippee liability. First, the tippee’s liability derives only from the tipper’s breach of a fiduciary duty, not from trading on material, non-public information. Second, the corporate insider has committed no breach of fiduciary duty unless he receives a personal benefit in exchange for the disclosure. Third, even in the presence of a tipper’s breach, a tippee is liable only if he knows or should have known of the breach.

Dirks counsels us that the exchange of confidential information for personal benefit is not separate from an insider’s fiduciary breach; it is the fiduciary breach that triggers liability for securities fraud under Rule 10b–5. For purposes of insider trading liability, the insider’s disclosure of confidential information, standing alone, is not a breach. Thus, without establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach.

In light of Dirks, we find no support for the Government’s contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability. Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets. The United States Supreme Court has affirmatively established that insider trading liability is based on breaches of fiduciary duty, not on informational asymmetries. This is a critical limitation on insider trading liability that protects a corporation’s interests in confidentiality while promoting efficiency in the nation’s securities markets.

As noted above, Dirks clearly defines a breach of fiduciary duty as a breach of the duty of confidentiality in exchange for a personal benefit. Accordingly, we conclude that a tippee’s knowledge of the insider’s breach necessarily requires knowledge that the insider disclosed confidential information in exchange for personal benefit.

In sum, we hold that to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: that (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.

In this case both Chiasson and Newman contested their knowledge of any benefit received by the tippers and, in fact, elicited evidence sufficient to support a contrary finding. Moreover, we conclude that the Government’s evidence of any personal benefit received by the insiders was insufficient to establish tipper liability from which Chiasson and Newman’s purported tippee liability would derive. Judgment vacated as to the convictions; remanded to the district court to dismiss the indictment with prejudice as it pertains to Newman and Chiasson.

Budget: $25.00

Due on: May 05, 2020 00:00

Posted: 11 months ago.

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