The Second Circuit’s decision in United States v. Newman1 continues to have a significant impact on the litigation of civil and criminal insider trading cases.2 The decision has led courts to look closely at what the government must prove to sustain charges against remote tippees—that is, tippees who are many steps removed from the ultimate source of material non-public information. Many high-profile prosecutions in recent years, including Newman, involved remote tippees who claimed that they were unfairly prosecuted for trading on information when they knew little or nothing about the source of the information.

The principal issue in Newman was what the government had to prove about the defendants’ state of mind. In one view, held by the district court in Newman, the government was required to prove simply that the defendants knew that the source of the information had breached a fiduciary (or similar) duty giving rise to an obligation of confidentiality. In the view of judges presiding over other cases, the government had to prove not only knowledge of the breach of duty but also knowledge that the source of the information had received a personal benefit in exchange for divulging information. Relying on the decision in Dirks v. SEC,3 the U.S. Court of Appeals for the Second Circuit held that the government was required to prove that a defendant knew both of the breach and of the exchange of benefit—a ruling that has cast doubt on the sufficiency of the evidence in a number of outstanding civil and criminal cases.

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