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When Your Barber Tips You

In December of 2012, Messrs. Newman and Chiasson were convicted in federal court of securities fraud and conspiracy to commit securities fraud. The government alleged that the defendants had obtained material, non-public information about Dell's earnings, as a result of which they made millions of dollars in profits for their funds.

In fact, the defendants were four levels removed from the insider tippers and there was no evidence that either of the defendants even knew of the source of the information.

The Appeals Court, in reversing the convictions, set forth certain elements that the government must establish beyond a reasonable doubt to convict someone of insider trading. United States v. Newman and Chiasson, Nos. 13-1837-cr(L), 13-1917-cr (con)(2nd Cir. Dec. 10, 2014).

The first is that insider had a fiduciary duty, which may well have been present in this case.

The second is that the insider breached this duty by disclosing confidential information to a tippee for a personal benefit. Here is where the government's case started to break down. The personal benefit alleged by the government was that the insiders and the first level of tippees (not the defendants) had attended school together and had worked at Dell together. They were family friends and attended church together.

There was no evidence of a pecuniary benefit or similarly valuable benefit to the insider tippee. Thus, the government did not prove its case.

In addition, the Appeals Court stated that that a tippee, such as these defendants, must know that confidential information was divulged for personal benefit to the insider. The government did not show evidence that the defendants knew anything about any personal benefit to the insiders.

As a result, the Appeals Court clarified that trading on material, non-public information, such as the tip you received from Sam the barber, is not enough to constitute a violation of the federal securities. There must be a personal benefit to the insider, and you must have known about the benefit to the insider for there to have been a violation.

The moral: the next time Sam advises you "Red Shoes in the third," pay attention.

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