Can a joke be the basis for insider trading liability?

Hypothetical:  

Tipper is a lawyer in possession of non-public information concerning an upcoming merger involving a client, Queen Pharmaceuticals.  Tippee is Tipper’s financial advisor and friend.  One night, Tipper had Tippee over for dinner.  After dinner, they discussed Tipper’s financial portfolio.  Tipper joked to Tippee: “it would be nice to be queen for a day.”  Tippee subsequently bought 50,000 shares of Queen Pharmaceuticals for Tipper and for other clients of Tippee. 

Key Considerations:

  • In an insider trading case, the government must prove that the insider will personally benefit from the disclosure to the tippee. 
  • Personal benefit can be established in a number of ways; one way is through the nature of the relationship between the tipper and the tippee, or the tipper’s receipt of something of value.
  • A critical question in an insider trading case is the tipper’s purpose: did the tipper share the material non-public information with the tippee intending that the tippee use the information to improperly trade in securities?
  • Even if the tipper’s statement, viewed on its own, is an innocuous joking comment– such as “it would be nice to be queen for a day” – a jury or court will consider the various pieces of evidence together and, in context, may view such a comment as the basis for insider trading liability.
  • The fact that tipper and tippee are also close friends does not detract from the relevance of tippee’s profession; in fact, it may supply an additional motive for tipper’s tip.


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