Tipping the Scales Against Insider Trading: Adopting a Presumption of Personal Benefit to Clarify Dirks
29 Pages Posted: 8 Dec 2016
Date Written: December 1, 2016
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: Suggested Citation