The government must show that the insider (tipper) provided the information to the trader (tippee) in exchange for things of value or a personal benefit.
Historically, the personal benefit requirement has been broadly construed to include (i) a pecuniary gain or a reputational benefit that will translate into future earnings; or (ii) the mere showing of an “intent[] to benefit.”1
In United States v. Newman, the Second Circuit held in 2014 that a jury cannot infer the requisite personal benefit to an insider who tipped a friend or relative absent “proof of a meaningfully close personal relationship [between the tipper and tippee] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”2
However, the recent Second Circuit en banc opinion in United States v. Martoma has effectively watered down Newman’s “meaningfully close personal relationship” test. Under Martoma, which appears to be the current state of the law, in order to demonstrate a personal benefit, the government need only show that (1) the tip was part of a quid pro quo or (2) that the tipper intended the tip to benefit the tippee.3
While the Martoma Court stopped short of expressly rejecting Newman’s “meaningfully close personal relationship” test—rather, holding that the test is satisfied merely by showing that the tipper intended to benefit the tippee—the Second Circuit has removed it as a meaningful hurdle to prosecution.
1 Dirks v. SEC, 463 U.S. 646, 663-64 (1983).
2 United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014).
3 United States v. Martoma, 894 F.3d 64, 74 (2d Cir. 2017).