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On June 21, 2019, Judge Paul G. Gardephe of the Southern District of New York vacated the guilty plea of Richard Lee, a former manager at SAC Capital. Lee had pleaded guilty in 2013 to insider trading, related to the purchase of Yahoo stock based on insider tips about imminent collaboration between Yahoo and Microsoft. Judge Gardephe vacated Lee’s guilty plea because his plea allocution did not establish his knowledge of any “personal benefit” that corporate insiders received as a result of providing him with this confidential information. Judge Gardephe concluded that “under the unusual circumstances of this case,” namely the fact that the personal benefit test had been changed so drastically by the Second Circuit and the Supreme Court between Lee’s plea and sentencing, his plea could not stand. Unfortunately for Lee, however, it is too early to celebrate. Given the significant weakening of the personal benefit test since 2013, the likelihood that prosecutors will be able to satisfy this requirement to prove Lee’s guilt is high.

As Judge Gardephe recognized, the personal benefit requirement for insider trading liability has been defined, redefined and threatened multiple times since Lee’s plea in 2013. The requirement was first introduced in Dirks v. SEC, 463 U.S. 646 (1983), as an element of “tippee” liability, which only occurs “when the insider has breached his fiduciary duty … and the tippee knows or should know that there has been a breach.” The Supreme Court held that “[a]bsent some personal gain, there has been no breach of duty.” Thus, for the tippee to be found guilty of insider trading, a jury must conclude that the tipper who provided that information did so for his own “personal benefit” rather than to further the interests of the individuals to whom the information ultimately belongs. Dirks emphasized that courts should rely on “objective facts and circumstances” to evaluate whether an insider personally benefits from a particular disclosure, so as to provide predictability and guidance “for those whose daily activities must be limited and instructed by the SEC’s inside-trading rules.”

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