United States v. Newman

United States Court of Appeals for the Second Circuit · 2014 · Corporations

773 F.3d 438 (2014)

Updated August 1, 2026

Corporationsinsider tradingpersonal benefittippee liabilitytipper liabilityscienterwillfulnessremote tippee

Facts

The Government alleged that insiders at Dell and NVIDIA leaked earnings information to analysts, who then passed it through multiple intermediaries to hedge fund portfolio managers Newman and Chiasson. Newman and Chiasson were three to four levels removed from the original insiders, and there was no evidence that either knew the insiders' identities or the circumstances of the disclosures. As to Dell, the Government showed that insider Rob Ray sought career advice from analyst Sandy Goyal; as to NVIDIA, insider Chris Choi and intermediary Hyung Lim were family friends from church. Newman and Chiasson traded on the information, generating profits for their funds, but the record showed analysts also routinely developed similar estimates through lawful modeling and company investor-relations contacts.

Issue

In a criminal insider trading prosecution of remote tippees, must the Government prove that the defendants knew the insider disclosed confidential information in exchange for a personal benefit? Also, was the evidence sufficient to prove both the insiders' personal benefit and the defendants' knowledge of the breach?

Rule

To sustain an insider trading conviction against a tippee, the Government must prove beyond a reasonable doubt that: (1) the corporate insider was entrusted with a fiduciary duty; (2) the insider breached that duty by disclosing confidential information to a tippee in exchange for a personal benefit; (3) the tippee knew of that breach, meaning he knew the information was confidential and was divulged for personal benefit; and (4) the tippee used the information to trade in a security or to tip another for personal benefit. A personal benefit cannot be inferred from a mere casual or social relationship; where based on relationship evidence, it requires a meaningfully close personal relationship generating an exchange that is objective, consequential, and at least potentially pecuniary or similarly valuable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Chicago, Elena Park, a portfolio manager at Lakefront Signal Partners, receives a highly accurate quarterly revenue figure for a public software company from her analyst, who says only that it came from "someone inside" the company. Elena knows the number is confidential and trades before the earnings release, but the analyst never mentions any reason the insider shared it.

If Elena is prosecuted criminally as a tippee, what is the strongest argument for acquittal?

Explanation. Tippee liability is derivative of the insider's fiduciary breach. Under the governing rule, the government must prove beyond a reasonable doubt that the insider breached a fiduciary duty by disclosing confidential information for a personal benefit, and that the tippee knew of that breach—meaning the tippee knew the information was confidential and divulged for personal benefit. Mere knowledge that the information was confidential and came from an insider is not enough.