Tipping the Scales Against Insider Trading: Adopting a Presumption of Personal Benefit to Clarify Dirks

29 Pages Posted: 8 Dec 2016

See all articles by Ronald J. Colombo

Ronald J. Colombo

Hofstra University - Maurice A. Deane School of Law

Date Written: December 1, 2016

Abstract

In this article, Professor Colombo anticipates the Supreme Court’s recent 8-0 decision in Salman v. United States (2016).The appropriate standard for assessing tipper-tippee liability for insider trading has been unsettled ever since the Court last spoke on the issue, in Dirks v. SEC (1983). This is due to Dirks’s unclear language, which appeared to articulate an unworkable standard predicated upon “personal benefit.” The lower courts have struggled to define this concept of “personal benefit.”The Ninth Circuit adopted an approach in which the personal benefit was essentially presumed, so long as the tips in question were made to a friend or relative. The Second Circuit, conversely, demanded that some tangible, material quid-pro-quo be demonstrated.

Professor Colombo argues that the optimal approach forward is one that largely dispenses with the requirement that personal benefit test. Diving deep into the facts of Dirks, Professor Colombo notes that the tipper in that case (who was exonerated by the Court) was actually a whistleblower. As such, Dirks can be read as holding that, absent evidence of good faith whistleblowing activity, unauthorized tipping is presumptively done for personal benefit and, consequently, unlawful.

The Supreme Court decision in Salman largely follows Prof. Colombo’s analysis. The Court held that a personal benefit can readily be inferred when a tipper gives inside information to a trading relative or friend.

Keywords: Securities Law, Insider Trading, Tipping, Tipper-Tippee Liability, Tipper, Dirks, Salman

JEL Classification: K22, K14, G14

Suggested Citation

Colombo, Ronald J., Tipping the Scales Against Insider Trading: Adopting a Presumption of Personal Benefit to Clarify Dirks (December 1, 2016). Forthcoming, Hofstra Law Review, Vol. 45, 2016, Hofstra Univ. Legal Studies Research Paper No. 2016-07, Available at SSRN: https://ssrn.com/abstract=2878992

Ronald J. Colombo (Contact Author)

Hofstra University - Maurice A. Deane School of Law ( email )

121 Hofstra University
Hempstead, NY 11549
United States

HOME PAGE: http://www.hofstra.edu/Academics/Law/index_Law.cfm

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