Growing Circuit Split Over United States v Newman Insider Trading Case
In convicting a Massachusetts attorney of insider trading, the First Circuit Court of Appeals declined to impose the higher standard established by the Second Circuit in the United States v. Newman insider trading case. The decision adds to the circuit split regarding insider trading cases, which should be resolved by the U.S. Supreme Court next term.
The Second Circuit’s Decision in Newman
In Newman, the Second Circuit made it significantly more difficult for prosecutors to win insider trading cases involving “remote tippees” who lack a direct relationship with the individual who disclosed the confidential information. It specifically held that that in order to sustain a conviction for insider trading, the prosecution must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. With regard to establishing a personal benefit, the appeals court further ruled that the prosecution must provide “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”
The First Circuit’s Insider Trading Decision
The First Circuit case, United States v. Parigian, involved information that Douglas Parigian received from his golfing buddy, who also happened to be a corporate insider. As alleged in the indictment, the tipper, Eric McPhail, solicited “getting paid back” by Parigian with wine, steak, and visits to a massage parlor. Parigian assured him that “I will take you for a nice dinner at Grill 23” (a high-end Boston steak restaurant).
In upholding Parigian’s conviction, the First Circuit held that that “the indictment’s allegations of a friendship between McPhail and Parigian plus an expectation that the tippees would treat McPhail to a golf outing and assorted luxury entertainment is enough to allege a benefit if a benefit is required.” While the panel acknowledged the Newman decision, it noted that, as a three-judge panel, it was bound by the First Circuit’s controlling precedent.
Supreme Court Review Next Term
Thankfully, the growing circuit split will likely be resolved next term. While the Supreme Court denied a petition to consider the Newman decision, the justices appeared to have had a change of heart. In January, the U.S. Supreme Court agreed to hear , which also involves whether the requisite personal benefit requires something more than just a close personal or family relationship. The specific question that will be addressed is:
Does the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC, 463 U.S. 646 (1983), require proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?
We will be closely following the status of this case and encourage our readers to check back for updates this fall.
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