It's All Derivative: Insider Trading Without a Personal Benefit

54 Am. Crim. L. Rev. Online 24

Raphael Davidian* 

The Supreme Court recently weighed different interpretations of insider trading liability in Salman v. United States. The first piece of this two-part series dealt with the arguments of the parties and the muddled case law. Courts have struggled with conflicting interpretations of the "classical theory" of insider trading as stated in the seminal case of Dirks v. SEC. The previous uncertainty in cases such as Salman comes from the following question: under what circumstances can a tippee (a person receiving confidential corporate information) be held liable for insider trading? Dirks held that the test to trigger liability is whether the corporate insider will in some way personally benefit from his disclosure to the tippee. It also held that liability derivatively extends to the tippee only if the tippee has reason to know that the information was disclosed in breach of a fiduciary duty. The Court in Salman, by simply reaffirming Dirks, missed an opportunity to significantly clarify tippee liability. While Salman involved a close relationship between brothers-in-law, lower courts will continue struggling to define whether a more remote relationship is sufficient to satisfy Dirks' "personal benefit" test. This piece discusses tippee liability under Dirks and argues that the Court in Salman should have read Dirks through the lens of the subsequent case, United States v. O'Hagan, rather than repeat a similarly imprecise ruling. In doing so, the Court could have incorporated useful elements of the "misappropriation theory" of liability for tippees.

Download full content.