Second Circuit to Shed Light on Personal Benefit Requirement for Tippee Liability


Anthony Chiasson’s infamous insider trading case has shed much light on the inequity underlying the inconsistencies of tippee liability.  The personal benefit requirement and its varying applications within the Second Circuit, unequivocally, is the main inconsistency the case highlights. Much like the game of telephone, the final recipient of inside information may know little about who was at the other end of the chain, how many people were caught in between, how the information has morphed along the way, and most importantly, whether the original tipper personally benefitted from their disclosure.

Insider trading is like the game of telephone

Insider trading is like the game of telephone

In Chiasson’s appeal, the Second Circuit will be confronted with a very important question: whether a tippee is required to have knowledge of an insider’s personal benefit under the classical theory of insider trading.  There have been varying opinions on the issue within the Southern District of New York alone.  In United States v. Whitman, Judge Rakoff found that a tippee must have knowledge that an insider personally benefitted as a result of breaching their fiduciary duty in disclosing the material nonpublic information.  Six months after Judge Rakoff’s decision in Whitman, Judge Sullivan reached the opposite conclusion in Chiasson’s case in United States v. Newman.  Judge Sullivan relied on the Second Circuit misappropriation case S.E.C. v. Obus in finding that a tippee need not have knowledge of whether an insider received a personal benefit.  Judge Sullivan stated that the articulation of tippee liability in Obus clarifies that the “tipper’s breach of a fiduciary duty and receipt of a personal benefit are separate elements and that the tippee need know only of the former.”

Overall, the result of having varying personal benefit applications employed currently by courts is inefficient and unfair for tippees.  Though a bright line rule resulting from this appeal will be instructive for district courts under the Second Circuit, it still will not be helpful to other courts across jurisdictional lines.  Until more action is taken to rectify the issue, investors across the country must exercise caution when deciding to trade on information they receive as passive recipients.  Investors must be aware of the risk posed by information acquired indirectly from obscure sources, and balance what that risk is worth.


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Fordham Journal of Corporate & Financial Law