Donald C. Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown Law School. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).
The accretive process by which insider trading law evolves—for all the benefits of incrementalism—has many critics. When insider trading law wobbles visibly on some matter, there are enhanced concerns about notice, predictability and due process as well as the substantive merit of the specific principles being applied. Judge Jed Rakoff recently said in an opinion that “the crime of insider trading is a straightforward concept that some courts have somehow managed to complicate.”
No subject in insider trading law has wobbled more recently than the standards for tipper-tippee liability. In 1983, the Supreme Court ruled in Dirks v. SEC that tipper-tippee liability requires proof that the tipper be breaching a fiduciary-like duty in passing on the information to the tippee for the tipper’s own personal benefit, and that the tippee knows or should know of that breach. For two decades after Dirks, the law steadily evolved in a way that made the personal benefit aspect easy for enforcers to satisfy. Two kinds became standard: quid pro quos with some pecuniary pay-offs (e.g., kickbacks to the tipper), and “gifts” of information to family members and friends. That increasingly relaxed approach emboldened both criminal prosecutors and the SEC. In a 2012 civil case, SEC v. Obus, the Second Circuit offered a sweeping restatement of all the elements of tipper-tippee liability, some never previously so characterized. Among other things, the Obus framework allowed tippees to be held liable without awareness of the tipper’s alleged benefit.