54 Pages Posted: 28 Aug 2016
Date Written: August 26, 2016
The Supreme Court in deciding Salman v. United States should update a confused and increasingly obsolete aspect of insider trading doctrine: the rule that the selective disclosure of material nonpublic information can only trigger insider trading liability if “the insider personally will benefit, directly or indirectly, from his disclosure.”
When it was introduced in Dirks v. SEC in 1983 this “personal benefit” test represented an imperfect effort to balance four competing rationales for determining when providing a tip should trigger insider trading liability. Two developments since Dirks was decided have made problems with this personal benefit test insurmountable. First, the SEC’s enactment of Regulation Fair Disclosure in 2000 supplanted federal common law regulation of selective disclosures by public companies and, more pointedly, prohibited public companies from making precisely the types of selective disclosures to Wall Street analysts that the Dirks personal benefit test was designed to protect. Second, the adoption of the misappropriation theory of insider trading in United States v. O’Hagan greatly expanded the types of deceptive conduct that might lead to insider trading liability with important ramifications for how to identify tipper wrongdoing.
After Regulation FD and O’Hagan, the best approach going forward for identifying tipper wrongdoing would be to go back to the underlying statutory prohibition against deceptive conduct. Receipt of a personal benefit should be a sufficient, but not necessary, condition for finding that a selective disclosure is sufficiently deceptive to trigger insider trading liability. Based on this updated standard, the Salman conviction should be upheld.
Suggested Citation: Suggested Citation
Guttentag, Michael D., Selective Disclosure and Insider Trading: Tipper Wrongdoing in the 21st Century (August 26, 2016). Florida Law Review, Vol. 69, 2016, Forthcoming; Loyola Law School, Los Angeles Legal Studies Research Paper No. 2016-20. Available at SSRN: https://ssrn.com/abstract=2830735