The law of insider trading is effectively the product of the common-law judicial interpretation of the broad terms of Section 10(b) of the Securities Exchange Act and Rule 10b-5. Thus, it is perhaps not surprising that defining insider trading law’s precise boundaries has been the subject of a fair amount of controversy over the years.1 One such controversy is teed up for resolution by the U.S. Court of Appeals for the Second Circuit in United States v. Newman,2 part of the recent spate of insider trading prosecutions brought by Southern District of New York federal prosecutors. The central issue on appeal has divided trial courts in the district: whether to be found guilty of insider trading a “tippee” must know that the insider who disclosed the information received a personal benefit for doing so.

Basics of Insider Trading Law

Typically, criminal insider trading cases are brought under one of two primary theories. Under the “classical” theory, a corporate insider commits insider trading when he either trades on material, non-public information in violation of the duty of trust and confidence owed to the shareholders of the corporation, or discloses such information to an outsider who trades on the information. In the latter instance, the tippee or outside recipient of the confidential information also is liable for insider trading where the tipper has breached his fiduciary duty to the company and its shareholders by disclosing such information to the tippee in return for some personal benefit, and the tippee is aware of the breach.

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