On Dec. 10, 2014, the Second Circuit decided United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, 136 S.Ct. 242 (2015). The court held that in order to prove that a “tipper” of insider information received in exchange for the tip a personal benefit sufficient to create liability, the government must offer “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” Id. at 452.
Before Newman, federal prosecutors routinely took advantage of the seemingly more forgiving Dirks v. SEC, 463 U.S. 646, 664 (1983), benefit test. Courts deemed the test satisfied where a tip was in exchange for “maintaining a useful networking contact,” United States v. Whitman, 904 F. Supp. 2d 363, 372 (S.D.N.Y. 2012), or where the tip was “a gift of information to a friend.” SEC v. Obus, 693 F.3d 276, 291 (2d Cir. 2012). Since Newman, no court has upheld an insider trading conviction based on such fuzzy reputational or networking benefits, such as the “career advice” the tipper received in Newman.
