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Beyond Dirks: gratuitous tipping and insider trading.

B. Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)

Four years after ITSA, Congress reaffirmed its view that "[i]nsider trading damages the legitimacy of the capital market and diminishes the public's faith" and expressed its continued support for a robust civil and criminal enforcement program. (235) But that congressional support need not be merely inferred from the House Committee on Energy and Commerce's Report or the floor debates leading up to the passage of ITSFEA. Instead, the Act itself contains express statutory findings that reflect Congress's ratification of the federal insider trading prohibitions arising under Rule 10b-5 and Rule 14e-3. Specifically, Congress declared a finding that "[t]he rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934 governing trading while in possession of material nonpublic, information" satisfy the statutory command that they be "necessary and appropriate in the public interest and for the protection of investors." (236) Congress further declared that the SEC has "enforced such rules and regulations vigorously, effectively, and fairly." (237) As Professor Steve Thel has observed, "[g]iven the heat of the debate over how much power Congress has given the SEC to regulate insider trading, it is remarkable that a statute directly addressed to that issue has been ignored for all practical purposes." (238) Because that debate has only intensified in the 19 years since the Court decided O'Hagan, the Salman case provides an important opportunity for it to acknowledge ITSFEA's findings as well as Congress's essential role in the development of insider trading jurisprudence.

ITSFEA contained several important provisions that amended the Exchange Act by: raising the maximum criminal penalties under Section 32(a) from a fine of $100,000 and/or five years in prison, to a fine of $1 million and/or ten years in prison; (239) modifying ITSA's penalty provision to clarify that tippers may be subject to civil penalties for any tipping activity that involves a violation of the law, irrespective of the tippee's liability; (240) extending the civil penalty provision to "controlling persons" who recklessly disregard the likelihood that an employee or agent is engaging in illegal tipping or trading; (241) requiring that broker-dealers and investment advisers establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information; (242) initiating a "bounty" program giving the SEC discretion to reward informants providing valuable information in insider trading cases; (243) and establishing an express private right of action for investors who traded contemporaneously with a person found to have violated an Exchange Act provision or rule by "by purchasing or selling any security while in possession of material, nonpublic information," (244) or for unlawfully communicating such information to a person who uses it to trade. (245)

The express right of action for contemporaneous traders, which ITSFEA codified at Section 20A of the Exchange Act, reflected another determination by Congress to depart from the fiduciary principle at the core of Chiarella and Dirks. As the House Report explained, Section 20A was "specifically intended to overturn court cases which have precluded recovery for plaintiffs where the defendant's violation is premised upon the misappropriation theory." (246) The House Report pointed in particular to the Second Circuit's decision in Moss v. Morgan Stanley Inc. (247) which, notwithstanding the prior criminal convictions of the defendants for illegal insider trading and tipping, affirmed a district court's dismissal of a Rule 10b-5 damage action brought by former shareholders of a tender offer target. ITSFEA's drafters clearly disagreed with the Second Circuit's conclusion that such contemporaneous traders should not be able to ride "'piggyback upon the duty owed by defendants'" to their investment bank employers who were advising the acquiring companies. (249) Notably, Section 20 A embodies the position that Chief Justice Burger articulated in his Chiarella dissent: that a person who misappropriates information owes by virtue of that fact an affirmative duty of disclosure to the parties on the other side of his securities transactions. (250)

As with ITSA, the period leading up to the passage of ITSFEA evidences Congress's serious consideration of the costs and benefits of adding into the bill an express statutory prohibition against trading securities on the basis of material nonpublic information. Over the period from 1986 to 1988, Congress held four sets of hearings devoted to the topic of insider trading regulation and considered multiple proposals for statutory definitions. (251) But while ITSFEA's drafters continued to be "cognizant of the importance of providing clear guidelines for behavior which may be subject to stiff criminal and civil penalties," (252) they ultimately concluded that the legal principles were "well-established and widely-known," and that "a statutory definition could potentially be narrowing, and in an unintended manner facilitate schemes to evade the law." (253)

Along the way, however, when the misappropriation theory appeared in jeopardy of being struck down by a possible five-justice majority, (254) the movement for an express statutory prohibition picked up steam. Consensus in the Senate began to build around a proposed bill entitled the "Insider Trading Proscriptions Act of 1987." (255) The bill, as it was later reconciled with an alternative version submitted by the SEC, proposed adding a new Section 16A to the Exchange Act, making it unlawful:

   [F]or any person, directly or indirectly, to purchase, sell or
   cause the purchase or sale of, any security, while in possession of
   material, nonpublic information relating thereto (or relating to
   the market therefor), if such person knows (or recklessly
   disregards) that such information has been obtained wrongfully, or
   that such purchase or sale would constitute a wrongful use of such
   information. (256)

However, when the Court's 4-4 affirmance in Carpenter v. United States left the misappropriation theory intact, (257) the apparent need for a statutory definition subsided. (258) Congress and the SEC soon returned to the view that insider trading jurisprudence could better develop through interstitial lawmaking in the context of civil and criminal prosecutions for violations of Section 10(b) and Rule 10b-5, as well as Section 14(e) and Rule 14e-3 in cases involving tender offers.

C. The Stop Trading on Congressional Knowledge (STOCK) Act of 2012

The SToCK Act codified for the first time an explicit legislative recognition that the Exchange Act encompasses insider trading prohibitions that arise under Section 10(b) and Rule 10b-5. (259) The Act also reflects Congress's recent judgment that interstitial lawmaking by federal courts continues to be an effective means of regulating the misuse of material nonpublic information in connection with securities trading--whether that information emanates from inside or outside of the government.

The momentum that fueled the STOCK Act's landslide votes of 96-3 in the Senate and 417-2 in the House (260) grew out of a claim in a 60Minutes broadcast that congressional insider trading was "perfectly legal." (261) To quell the public's outcry, Congress quickly held hearings on proposed bills seeking to ban the purported practice, (262) and in the span of a few short months, passed legislation that President Obama signed into law in April 2012. As the Senate Report reflects, although the STOCK Act's drafters recognized that a federal court could theoretically apply misappropriation theory analysis if it were presented with a prosecution involving congressional insider trading, they were uncertain as to whether "the unique nature of an elected office of Congress ... [would] give[] rise to a fiduciary-like duty owed ... to anybody." (263) The STOCK Act addressed this uncertainty by adding new provisions to the Exchange Act--Section 21 A(g) and Section 21A(h)--which provide that "solely for the purposes of the insider trading prohibitions arising under this Act, including section 10(b) and Rule 10b-5 thereunder," all federal officials, including members of Congress, owe "a duty arising from a relationship of trust and confidence" to the United States government and its citizens with respect to material nonpublic information obtained in connection with their government service. (264) Prior to these amendments to the Exchange Act, the federal insider trading prohibitions arising under Section 10(b) and Rule 10b-5 had been rooted solely in a judicially implied claim. Thus, the STOCK Act made explicit what Congress had previously ratified through its enactment of ITSA and ITSFEA.

But the STOCK Act's amendments to the Exchange Act are important for a second reason: they reinforce insider trading law's collaborative nature by expressly "incorporat[ing] the fiduciary duty approach reflected" in Chiarella, Dirks, and O'Hagan. (265) Prior bills leading up to the legislation had sought to resolve the controversy by amending the Exchange Act to include an outright statutory proscription against congressional insider trading. (266) But the STOCK Act's drafters ascribed to the "duty of trust and confidence" approach as a means of ensuring "that the insider trading prohibitions apply to Members of Congress in the same way that they apply to everyone else" and to leave unaltered "the construction of the antifraud provisions of the securities laws [and] the authority of the SEC or DOJ under those provisions." (267) Although Congress could have used the 60 Minutes-generated controversy to enact an express statutory prohibition of insider trading and tipping that would apply to the entire investing public (including its own members), (268) SEC officials once again cautioned against the adoption of a statutory proscription, (269) and other witnesses proffered similar advice. (270)


As the foregoing Sections demonstrate, in the 36 years since Justice Powell authored the decision in Chiarella, Congress has hardly been silent as to the scope of the federal prohibitions against insider trading and tipping. To the contrary, the legislative developments reflected in ITSA, ITSFEA, and the STOCK Act evidence concerted congressional judgments rendered only after repeated consultations with securities law scholars and practitioners, and more importantly, with the expert agency officials at the SEC. These judgments confirm Congress's multiple determinations that the fraud-based rubric--and the interstitial lawmaking that is a necessary function of that rubric--puts securities traders on sufficient notice that securities transactions based on misappropriated information will be subject to stiff monetary fines and harsh criminal penalties. (271) And notwithstanding several recent bills introduced by individual members of Congress, (272) and a plethora of prior suggestions from securities law scholars. (273) Congress has not shown a willingness to reconsider its prior determinations that insider trading is best regulated as a species of securities fraud.


As publicly traded companies, both Dell and NVIDIA are subject to the requirements and prohibitions in Regulation FD. (274) Yet remarkably, the Newman court never once mentioned this regulation nor the legal constraints that it placed on Dell's and NVIDIA's insider-tippers. This omission is all the more striking because Regulation FD, throughout the last 15 years, has regulated the very space that Dirks sought to create--and the Second Circuit sought to expand--for insider-analyst communications. (275) This myopia substantially undermined Newman's conclusion that gratuitous tipping, and trading on such tips, does not amount to a violation of Rule 10b-5.

A. Regulation FD's Purpose and Scope

As other securities law scholars have recounted, the SEC adopted Regulation FD to navigate around the personal benefit hurdle that Dirks had erected in tipper-tippee insider trading cases. (276) Over the decade prior, the SEC became increasingly concerned that corporate executives were routinely providing securities analysts and professional investors with material nonpublic information pertaining to their companies, including advance notice of earnings announcements, product developments, and corporate reorganizations. (277) The agency found this practice of selective disclosure blatantly unfair because "those who were privy to the information beforehand were able to make a profit or avoid a loss at the expense of those kept in the dark." (278) The SEC also emphasized the "close resemblance" between issuer selective disclosure and insider tipping and trading. (279) As the SEC explained:

   In both cases, a privileged few gain an informational edge--and the
   ability to use that edge to profit--from their superior access to
   corporate insiders, rather than from their skill, acumen, or
   diligence. Likewise, selective disclosure has an adverse impact on
   market integrity that is similar to the adverse impact from illegal
   insider trading: investors lose confidence in the fairness of the
   markets when they know that other participants may exploit
   "unerodable informational advantages" derived not from hard work or
   insights, but from their access to corporate insiders. (280)

But as the SEC rather grudgingly came to recognize, (281) absent the receipt of a personal benefit by a corporate executive, the Dirks decision allowed valuable corporate information to be legally dribbled out to securities analysts, who could legally trade securities on the basis of those selective disclosures or advise their clients to do so. (282) Until the SEC acted to change that practice, corporate executives could almost always come up with a corporate purpose for sharing material nonpublic information with securities analysts and other securities professionals. (283)

Regulation FD, which took effect in October 2000, sought to level the playing field for ordinary investors by effectively banning the practice of selective disclosure and thereby thwarting the privileged securities trading that came with it. The SEC did so by exercising its rulemaking authority under Section 13(a) of the Exchange Act, which empowers the agency to mandate ongoing disclosure by SEC reporting issuers. (284) The regulation applies only to disclosures made in the name of the issuer or by "person[s] acting on [its] behalf," a term that includes senior executives as well as any "investor relations or public relations officer" or any employee "who regularly communicates" with securities industry professionals or institutional investors. (285) However, it extends to disclosures made by those persons only to four categories of recipients:

   (1) broker-dealers and their associated persons [including
   sell-side securities analysts], (2) investment advisers, certain
   institutional investment managers and their associated persons, and
   (3) investment companies, hedge funds, and affiliated persons
   [including buy-side analysts and (4)] ... any holder of the
   issuer's securities, under circumstances in which it is reasonably
   foreseeable that such person would purchase or sell securities on
   the basis of the information. (286)

Regulation FD also explicitly exempts disclosures made to temporary agents who owe a duty of loyalty to the issuer (such as attorneys, accountants or other advisers), (287) as well as to other persons who have "expressly agree[d] to maintain the disclosed information in confidence." (288) In addition, the regulation specifies that an "officer, director, employee, or agent of an issuer who discloses material nonpublic information in breach of a duty of trust or confidence to the issuer shall not be considered to be acting on behalf of the issuer." (289) But for this latter qualification, an insider's illegal tipping in violation of Rule 10b-5 would likewise trigger a Regulation FD violation on the part of the issuer.

Regulation FD's effective ban on "unfair selective disclosure" follows from a consequence of its rules rather than from an explicit prohibition in its text. (290) Its basic mandate requires that whenever an issuer or a person acting on its behalf discloses material nonpublic information to any of the four enumerated categories of recipients, the issuer must make public disclosure of that same information "simultaneously" for "intentional" (i.e., knowing or reckless) disclosures, (291) or "promptly" for non-intentional disclosures. (292) The clear intent behind the SEC's "simultaneous" disclosure requirement is to prohibit issuers and their officials from intentionally making selective disclosures to those persons who are most likely to trade on that information. In other words, Regulation FD puts issuers and their officials to an "all or nothing choice: they are not required to disclose any more information than before, but if they tell someone, they must tell everyone." (293) If the issuer fails to "tell everyone," the issuer's antifraud liability for material omissions liability is not affected, (294) but the SEC can bring an enforcement action for the issuer's violations of Regulation FD and Section 13(a) as well as against the issuer official who caused, or aided and abetted, those violations. (295) Securities analysts may likewise be liable for causing or aiding and abetting an issuer's Regulation FD violations, in certain instances. (296)

Although Regulation FD reflects the SEC's concerted effort to regulate issuers and their disclosure practices rather than securities investors and their trading, the regulation was clearly constructed with the troubling practices of securities analysts in mind. The Final Rule Release made a particularly pointed reference to the "practice of securities analysts seeking 'guidance' from issuers regarding earnings forecasts," and it cautioned corporate officials that private discussions with analysts who are seeking guidance about earnings estimates presents a "high degree of risk under Regulation FD." (297) Favoring directness to subtlety, the SEC explicitly warned that "[i]f the issuer official communicates selectively to the analyst nonpublic information that the company's anticipated earnings will be higher than, lower than, or even the same as what analysts have been forecasting, the issuer likely will have violated Regulation FD." (298)

Thus, as Professors Robert Thompson and Ronald King have aptly summarized, through its adoption of Regulation FD "the SEC has reversed the legal consequences of the analyst's conduct discussed in Dirks" (299) Regardless of any possibly positive effect on pricing efficiency, selective disclosures about earnings results--or any other intentional transfers of material nonpublic information to securities analysts--are now unlawful, even if the issuer official is not tipping that information for a personal benefit.

B. The Interplay Between Regulation FD and Gratuitous Tipping

The Second Circuit's failure to consider the post-Dirks development brought about by the SEC's adoption of Regulation FD substantially undermines Newman's conclusion that gratuitous tipping and trading on such tips does not constitute a violation of Rule 10b5. Regulation FD radically changed the legal landscape for private, one-on-one discussions between issuer officials (such as the Dell insider, who worked in its investor relations department) and securities industry professionals (such as his friend/acquaintance, the Neuberger Berman analyst). (300) Thus, if the insider at Dell did not intentionally tip the analyst so that he could trade securities (or advise others to trade), that insider likely caused, or aided and abetted, Dell's violation of Regulation FD. Moreover, virtually all publicly traded companies now have stringent policies and procedures in place to guard against Regulation FD violations. (301) Such internal policies have sensitized all employees to the perils of disclosing material nonpublic information (especially earnings-related), even if an employee (such as the NVIDIA insider, who worked in the finance unit) is not a "senior executive" or otherwise covered by the prohibitions in Regulation FD. (302)

The Court's decision to consider Newman's personal benefit standard in the context of the Salman petition opens the door for a new interpretation of Rule 10b-5's insider trading prohibition that takes full account of Regulation FD. The consequences for the precedent in Dirks and the controversy over gratuitous tipping are two-fold.

First, against the backdrop of Regulation FD, it now makes little sense to narrowly interpret the personal benefit element to facilitate what Dirks had viewed as the analyst's role in "ferret[ing]" out material nonpublic information from an issuer's officials. (303) For as long as Regulation FD remains on the books--and notwithstanding the studied views of several distinguished securities law scholars (304)--that type of ferreting by securities analysts is no longer revered by the SEC as "necessary to the preservation of a healthy market." (305) Thus, Regulation FD has sucked out most of the air from the very space that Dirks created for insider-analyst communications. (306) Newman's narrow reading of Dirks plainly encourages activity that constitutes a violation of Regulation FD and, in the SEC's expert judgment, leads to a loss of investor confidence in the fairness and integrity of the securities markets. (307) The notion that courts should interpret Rule 10b-5 narrowly to facilitate an activity that is currently unlawful is both strange and unsettling.

Second, Regulation FD leaves corporate insiders, particularly those in investor relations or finance departments, with little room for a credible claim that selective disclosures about earnings information were prompted by a mistaken belief about whether it "already has been disclosed or that it is not material enough to affect the market." (308) Publicly traded companies have been highly proactive in forbidding communications that could be construed as a leak of material nonpublic information. Such companies likewise issue frequent and unambiguous warnings pertaining to the confidentiality of preannouncement earnings. These admonishments are likely prompted by the SEC's depiction of these communications as involving a "high degree of risk." (309)

Thus, before concluding that the circumstantial evidence surrounding the multiple instances of tipping "was simply too thin" to support the jury's finding of a personal benefit by the Dell and NVIDIA insiders, (310) the Second Circuit should have drilled down more deeply into the question of motivation. As the Seventh Circuit recognized in Maio, absent some "legitimate reason" for the insider's disclosure, the inference that information was "improperly] gift[ed]" may be "unassailable." (311) Given the jury's finding of personal benefits, and Regulation FD's clear prohibition of selective disclosure, gratuitous tipping for the "ephemeral benefit of the 'value of ... friendship,'" (312) may well have been the explanation that convinced the jury beyond a reasonable doubt that the tippers had violated the fiduciary duties that they owed to Dell and NVIDIA and that the defendants knew, or consciously avoided knowing, about their breaches. (313)


Along with the O 'Hagan decision, the Exchange Act amendments (in ITSA, ITSFEA, and the STOCK Act), and Regulation FD, the Delaware judiciary's expanded notion of the fiduciary duty of loyalty has an important bearing on insider trading cases involving gratuitous tipping. Although the insider trading and tipping prohibitions arising under Rule 10b-5 implicate federal common law, federal courts often look to state law in determining whether a fiduciary has breached a duty of trust and confidence by trading securities on the basis of material nonpublic information, or by disclosing such information to someone else who used it to trade. As the court observed in United States v. Whitman, (314) "general principles of state fiduciary law ... [can provide] helpful guidance for determining the parameters of the applicable federal common law to be applied." (315)

State fiduciary law can offer particularly valuable guidance on two questions that lie at the core of Rule 10b-5's prohibition of tipping: 1) [h]ow should a court regard the careless disclosure of material nonpublic information when a fiduciary does not intend for securities trading to result and 2) how should a court regard a fiduciary's deliberate action to disclose entrusted information so that it can be used to provide one or more persons with a securities trading advantage? The Delaware Supreme Court's decision in The Walt Disney Company Derivative Litigation (316) has direct relevance to the first question and Stone v. Ritter offers an important perspective on the second. (317)

Taken together, both Disney and Stone will provide the Supreme Court in Salman with a compelling justification for rejecting Newman's restrictive view that tipping violates Rule 10b-5 only when a fiduciary shares entrusted information in the context of "a meaningfully close personal relationship" when information is exchanged for "a personal benefit of ... some consequence." (318) Moreover, because Stone construes breaches of the duty of loyalty to include not only self-dealing but also other deliberate actions evidencing a lack of good faith, the standards from that decision can also provide federal courts with "objective criteria" in making determinations about whether a tippee "knows or should know that there has been a breach." (319) Indeed, when Justices Powell and Ginsburg referenced the "duty of trust and confidence" in their respective opinions in Dirks and O 'Hagan, they could not possibly have had in mind the more expansive notion of loyalty that the Delaware Supreme Court developed in 2006.

A. The Duty of Loyalty under Delaware Law

State fiduciary law has long distinguished between the duty of care and the duty of loyalty. (320) In the realm of corporate law, the consequences of this distinction are particularly important because a fiduciary's violation of the duty of care can be exculpated and/or indemnified by the corporation, whereas violations of the duty of loyalty cannot. Delaware law, for example, permits a corporation to eliminate or limit a director's personal liability for monetary damages "for breach of fiduciary duty as a director," but the provision will not allow exculpation involving "any breach of the director's duty of loyalty to the corporation or its stockholders" or "for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law." (321) Delaware's indemnification statute likewise permits a corporation to indemnify its officers and directors for actions taken "in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation." (322) Although the precise wording of such exculpation and indemnification provisions vary from state to state, Delaware's provisions and the case law that interprets them have tremendous significance not only because most publicly traded companies are incorporated in Delaware, but also because many states use Delaware as a guide for developing their own statutes and case law.

The Disney litigation involved a derivative suit by shareholders against the company' s directors and officers for damages arising out of the hiring and firing of the company's President, Michael Ovitz. (323) The shareholders claimed that members of the board of directors had violated their fiduciary duties by first approving an out-sized compensation package in Ovitz's employment contract and then, less than a year later, by allowing a no-fault termination payment that cost the company approximately $130 million. If the shareholders were successful in proving that these actions by the board were the result of a lack of good faith, then the damages sought by the shareholders could neither be exculpated nor indemnified.

Recognizing that the parameters of the duty to act in good faith had been "relatively uncharted," the Delaware Justices set out in Disney to remedy that deficiency. (324) The court noted in particular that to adopt "a definition that conflates the duty of care with the duty to act in good faith by making a violation of the former an automatic violation of the latter, would nullify those legislative protections and defeat the General Assembly's intent." (325) It thus held explicitly that "[t]here is no basis in policy, precedent or common sense that would justify dismantling the distinction between gross negligence and bad faith." (326) But the court then provided some much needed guidance as to what a duty to act in good faith entails:

   [T]he universe of fiduciary misconduct is not limited to either
   disloyalty in the classic sense (i.e., preferring the adverse
   self-interest of the fiduciary or of a related person to the
   interest of the corporation) or gross negligence. Cases have arisen
   where corporate directors have no conflicting self-interest in a
   decision, yet engage in misconduct that is more culpable than
   simple inattention ... [F]iduciary conduct of this kind, which does
   not involve disloyalty (as traditionally defined) but is
   qualitatively more culpable than gross negligence, should be
   proscribed. A vehicle is needed to address such violations
   doctrinally, and that doctrinal vehicle is the duty to act in good
   faith. (327)

The court also provided three examples of deliberate conduct that indisputably evidences a fiduciary's failure to act in good faith:

   A failure to act in good faith may be shown, for instance, where
   the fiduciary intentionally acts with a purpose other than that of
   advancing the best interests of the corporation, where the
   fiduciary acts with the intent to violate applicable positive law,
   or where the fiduciary intentionally fails to act in the face of a
   known duty to act, demonstrating a conscious disregard for his
   duties. (328)

Thus, Disney held not only that "grossly negligent conduct, without more, does not and cannot constitute a breach of the fiduciary duty to act in good faith." (329) It also made clear that shareholders could pursue a claim for lack of good faith outside of the standard self-dealing and conflicts of interest scenarios that are ordinarily implicated by the duty of loyalty. (330)

Less than five months later, in Stone v. Ritter, (331) the Delaware Supreme Court clarified an important doctrinal consequence that follows from a fiduciary's failure to act in good faith. After reiterating the three examples from Disney of deliberate conduct evidencing a lack of good faith (one of which was "where the fiduciary acts with the intent to violate applicable positive law"), (332) the court held explicitly that the obligation to act in good faith was not a separate stand-alone fiduciary duty. (333) Instead, the fiduciary obligation to act in good faith is a core component of the duty of loyalty. (334) As the Justices explained:

   [T]he fiduciary duty of loyalty is not limited to cases involving a
   financial or other cognizable fiduciary conflict of interest. It
   also encompasses cases where the fiduciary fails to act in good
   faith. As the Court of Chancery aptly put it in Guttman," [a]
   director cannot act loyally towards the corporation unless she acts
   in the good faith belief that her actions are in the corporation's
   best interest." (335)

Thus, the incorporation of a good faith obligation into the duty of loyalty substantially expanded the circumstances under which successful claims for a breach of the duty of loyalty might be brought. (336)

As the above passage from Stone makes clear, the Delaware Supreme Court's determination that the duty of loyalty encompasses an obligation to act in good faith echoed the observation made years before by then-Vice Chancellor (now Delaware Chief Justice) Leo Strine:

   It does no service to our law's clarity to continue to separate the
   duty of loyalty from its own essence; nor does the recognition that
   good faith is essential to loyalty demean or subordinate that
   essential requirement.... The reason for the disloyalty (the
   faithlessness) is irrelevant, the underlying motive (be it venal,
   familial, collegial, or nihilistic) for conscious action not in the
   corporation's best interest does not make it faithful, as opposed
   to faithless. (337)

In Guttman, the court stated plainly that "one cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obligated to obey." (338) Of course, after Disney and Stone, the law is clear that negligent conduct--or even grossly negligent conduct--that results in the corporation's violation of a federal or state law would not constitute a deliberate failure to act in good faith. But a fiduciary's intentional violation of positive law, at least under Delaware law, now violates the duty of loyalty. (339)

B. The Interplay between State Fiduciary Law and Rule 10b-5

When the Salman Court considers the legality of gratuitous tipping, the landmark decisions in Disney and Stone will, in the words of Whitman, provide "helpful guidance for determining the parameters" of Rule 10b-5's insider trading and tipping prohibitions. (340) Disney's holding that gross negligence by itself cannot evidence a lack of good faith is coextensive with Dirks's view as to when the disclosure of material nonpublic information to a person outside the corporation constitutes an unlawful tip. Talking indiscreetly about confidential information in a crowded train car, (341) or even sharing confidential information with others (including a securities analyst) in a mistaken belief that the information is either immaterial or already public, (342) implicates actions that are negligent or at most grossly negligent. Whistleblowing to expose fraud or corruption at a company likewise does not evidence a deliberate failure to act in good faith and thus does not constitute a violation of a fiduciary's duty of loyalty. (343)

In sharp contrast, a fiduciary who "acts with a purpose other than that of advancing the best interests" of his employer (344)--such as disclosing entrusted M&A information to provide one's brother with trading advantage over others in the market--is consciously failing to act in good faith and is thus violating his duty of loyalty. Likewise, the insiders at Dell and NVIDIA would have failed to act in good faith, and thereby violated their duties of loyalty, if they intentionally leaked unreleased earnings information to their friends (or acquaintances) knowingly or recklessly disregarding the procedures put in place by their companies to guard against violations of Regulation FD.

Thus, had the Newman court considered the state fiduciary law reflected in Disney and Stone, it might have reached different results on the tipper's personal benefit issue as well as the defendants' knowledge issue. The evidence in Newman did not suggest that the insiders at Dell and NVIDIA had any legitimate reason for repeatedly disclosing confidential earnings-related information. Nor can it be claimed that the repeated patterns of disclosures were mere slips of the tongue or that the insiders were unaware of the market-sensitive nature of their regularized leaks of confidential information. Thus, assuming the tips by the insiders had been for the "ephemeral benefit of the 'value of [the tippee's] friendship,'" (345) those tips would have been deliberate actions not in good faith and thereby an undisclosed breach of their loyalty duties owed to Dell and NVIDIA as well as the companies' shareholders. And if the defendants knew or consciously avoided knowing that the disclosures constituted violations of Regulation FD, and/or flagrantly contravened compliance procedures at Dell and NVIDIA, then their knowledge of those breaches of loyalty would support their Rule 10b-5 liability, regardless of the defendants' knowledge of a personal benefit on the part of the insiders. In short, the Newman jury could have reasonably concluded that experienced professionals in the securities industry must either have known or consciously avoided knowing that a public company's quarterly-earnings cannot be regularly made available other than through deliberate actions not taken in good faith by corporate insiders who had been entrusted with that information. (346)


In view of Salman's uncontroverted facts, which involved gratuitous tips passed from an investment banker to his older brother, the Supreme Court could affirm the Ninth Circuit and disavow the Newman ruling, without any need to look beyond its prior statements in the Dirks decision. Indeed, as the first part of this Article demonstrated, the Second Circuit's decision to overturn the jury's finding on the personal benefit issue was based on ostensible constraints that appear nowhere in Dirks itself. Specifically, Dirks did not limit its "gifting" theory to disclosures that were made only in the context of a "meaningfully close personal relationship." (347) And Dirks never conditioned application of its gifting theory on a showing that the tipper must have sought or expected some form of pecuniary exchange or other tangible benefit from the recipient. Instead, as the Ninth Circuit emphasized, Dirks was explicit in recognizing that "'[t]he elements of fiduciary duty and exploitation of nonpublic information [] exist when an insider makes a gift of confidential information to a trading relative or friend.'" (348) Accordingly, under Dirks, it is irrelevant whether the tippee is a beloved older brother, a best friend from college, a former business school classmate and colleague, or a family friend from church. If the "purpose of the disclosure" (349) was to enable the recipient to benefit from the principal's information, the fiduciary's purpose was indisputably "improper," (350) and the fiduciary's disclosure would have constituted a breach of duty under Dirks. And as a co-participant in the tipper's breach of duty, the beneficiaries of those tips would have inherited the insider's Rule 10b-5 disclosure obligation to shareholders if "the tippee knows or should know that there has been a breach." (351)

However, the Court in Salman now has before it the very same type of choice that the Court confronted more than 33 years ago. That is, Justice Powell viewed Dirks to be an "'easy'" case. (352) Justice Powell, however, wanted to do more than simply vacate the censure of the investment analyst who had advised clients to trade securities on the basis of nonpublic information provided by a corporate whistleblower. (353) As Justice Powell explained to his colleagues on the Court, "'[d]eciding this case without identifying a general principle would accomplish very little.'" (354) The Justices in Salman could likewise limit themselves to a narrow ruling on Salman's easy facts. (355) But the Court could accomplish so much more by identifying "a general principle" that would govern in subsequent insider trading cases, perhaps for decades to come.

For the reasons discussed below, the Salman Court should seize this opportunity to make insider trading law substantially more coherent and legitimate. The first Section raises tipping scenarios that are motivated by something other than a tipper's desire to enrich either himself, a friend, or a relative. In such scenarios, the spirit of Dirks and the letter of O 'Hagan would be satisfied with a liability test that turns on a tipper's deceptive breach of a fiduciary duty of loyalty, whether or not the tipper received a personal benefit in exchange for the information. Thus, were the Court to follow this path, it could act modestly in clarifying joint tipper-tippee liability by focusing on breaches of loyalty in both classical and misappropriation theory contexts. The second Section explores how the Court can use the Salman case to re-conceptualize insider trading law more generally. Although fiduciary principles should have a substantial role in Rule 10b-5's insider trading and tipping prohibitions, the crux of the offenses involve defrauding investors by trading on information that was obtained wrongfully, regardless of whether the trader or the tipper violated a fiduciary duty owed to the issuer or the source of the information.

A. Joint Tipper-Tippee Liability Premised on Deceptive Breaches of Loyalty

The Court in Salman could clarify insider trading law considerably by delineating the specific duty that a tipper must breach in order for a tippee to owe a disclosure obligation under Rule 10b-5, either to the issuer's shareholders (in classical cases involving corporate insiders) or to the source of the information (in misappropriation cases involving fiduciary outsiders). Dirks makes a host of general references to "fiduciary" duties or breaches. (356) But these open-ended phrases, in conjunction with the Court's more explicit references to "personal gain," (357) have left some scholars convinced that Dirks was focused entirely on a fiduciary's duty to refrain from direct or indirect self-dealing. (358) And under such a reading of Dirks, many indisputably deceptive breaches of the duty of loyalty would not amount to illegal tipping--even when a tipper knew full well that the information he disclosed would be used to advantage some traders over others in the securities markets.

It is precisely here that O 'Hagan's depiction of the Rule 10b-5 disclosure duty holds more promise. Because O'Hagan views a fiduciary's misappropriation as a betrayal that deprives the principal "of the exclusive use of [its] information," (359) under either the classical or the misappropriation theory, the insider trading prohibition could extend to any deceptive breach of the fiduciary's duty of loyalty, insofar as the breach involves a secret disclosure of information that is shared with others for securities trading purposes. (360) Moreover, reading O 'Hagan to encompass such secret and disloyal breaches gives effect to important changes in state corporate law: breaches of loyalty are no longer limited to instances of self-dealing or other conflicting interests; they can also be shown when a fiduciary deliberately fails to act in good faith. (361)

Consider, for example, an imaginative scenario posited by Professor James Cox that involves an employee who, "like a modern day Paul Revere," rides through a town sharing highly confidential good news in advance of a major press conference planned by his corporate employer. (362) There should be no doubt that a fiduciary who deliberately makes such disclosures would be failing to act in good faith and would be breaching his duty of loyalty; (363) and if he feigned fidelity to his employer after his ride was complete, he would be doing so deceptively (at least until the employer learned of his antics). If this employee were acting to facilitate securities trading by the townspeople, or if the townspeople's securities trading was clearly foreseeable, he would have engaged in conduct that constituted tipping--even if those tips were being disseminated to complete strangers with absolutely nothing sought or expected by the employee in return. (364) In view of his deceptive lack of good faith, and in light of O'Hagans concerns about market integrity and investor confidence, (365) that employee could be held liable for illegal tipping under Rule 10b-5. As Delaware Chief Justice Strine has emphasized, "the reason for the disloyalty (the faithlessness) is irrelevant, the underlying motive (be it venal, familial, collegial, or nihilistic) for conscious action not in the corporation's best interest does not make it faithful, as opposed to faithless." (366) Justices Blackmun and Marshall made essentially that same point in Dirks when they criticized the majority for engrafting "a special motivational requirement on the fiduciary duty doctrine." (367)

Moreover, under a test for joint tipper-tippee liability that turned on the tipper's deceptive breach of loyalty, some of the townspeople who traded securities based on the employee's disclosures could be liable under Rule 10b-5 as well. As the Court outlined in Dirks, their liability would depend on "what they knew or should have known" regarding the employee's breach of loyalty. If they knew or should have known that the employee deliberately failed to act in good faith in violation of a loyalty obligation owed to his employer to keep corporate secrets, then a claim under Rule 10b-5 could be stated against the townspeople for their illegal trading, assuming the SEC could prove scienter. Placing the test for liability on a tippee's knowledge of the tipper's breach of loyalty, rather than on knowledge of the tipper's personal benefit, provides the "objective criteria" that the Court had been seeking in Dirks. (368)

A less imaginative scenario, but a far more realistic one, would involve an investor-relations official at a publicly traded company. Assume that the official causes the company to violate Regulation FD by intentionally or recklessly disclosing material nonpublic information to the investment manager of a holder of the company's securities, "under circumstances in which it is reasonably foreseeable that the person will [trade] the issuer's securities on the basis of the information." (369) Suppose, for instance, the official was operating under a misguided view that such selective disclosure was in the company's best interest--perhaps because the holder was a valued institutional investor that owned a substantial amount of the company's shares. Under the Stone decision, the official's "intent[ion] to violate applicable positive law" would constitute a deliberate failure to act in good faith and thus a breach of her duty of loyalty. (370) And under O 'Hagan, if the official kept her violations of Regulation FD secret from the company, she would be "feign[ing] fidelity." (371) The official's selective disclosures to the investment manager could therefore constitute illegal tipping under Rule 10b-5, even if the investment manager had been a mere casual acquaintance or a complete stranger. (372) once again, the personal motivation behind the investor-relations official's deliberate actions in violation of Regulation FD would be irrelevant to the question of whether her intentional leaks of confidential information constituted a breach of her duty of loyalty. (373)

A remaining question concerns the investment manager-tippee, who clearly traded on material nonpublic information that "ha[d] been made available to [the manager] improperly." (374) As the beneficiary of the official's intentional selective disclosures in violation of Regulation FD, the manager's investment funds could reap tremendous gains, as did the hedge funds managed by the defendants in Newman. (375) Because all investment managers are well aware of the prohibition of selective disclosure under Regulation FD, that manager either knew or recklessly disregarded that the investor-relations official had breached a duty of loyalty that she owed to the company to comply with "applicable positive law." (376) Here again, the manager's awareness (or willful ignorance) that the tip emanated from a violation of federal securities law provides a court with "objective criteria" similar to the type that Dirks sought with its personal benefit test. (377) Thus, consistent with O 'Hagan's policy objectives, and in view of the clarity of the Regulation FD violation at issue, the government would be justified in pursuing a Rule 10b-5 claim against the manager for illegally trading on the basis of selectively disclosed information. As a co-participant in the official's deceptive breach of a loyalty duty owed to the shareholders of the company, the manager would likewise be violating Rule 10b-5 in connection with the purchase or sale of securities. (378)

In short, O 'Hagan advanced insider trading law considerably by stating explicitly that a loyalty duty is breached when fiduciaries misappropriate material nonpublic information and deprive their principals of the exclusive use and control over such information. The Salman Court now has the opportunity to advance the law even further by holding explicitly that breaches of loyalty in connection with securities trading trigger for tippers a Rule 10b-5 disclosure obligation, and that tippees inherit that obligation when they know or should know that the tipper has deliberately failed to act in good faith by conveying entrusted information. A desire for personal gain--or for a gain by one's friend or relative--may well be the most common explanation for tipping, whether by corporate insiders or fiduciary outsiders. But other conscious failures to act in good faith can facilitate stock trading tips, and to paraphrase O 'Hagan again, it would make "scant sense to hold [a tipper] a [section] 10(b) violator if he" engaged in a quid pro quo or gratuitous tipping, but not if he consciously failed to act in good faith by providing a trading advantage to a third-party acquaintance or even a complete stranger. (379)

B. Insider Trading Based on a "Fraud on Contemporaneous Traders"

As the foregoing has demonstrated, O'Hagan's "fraud on the source" misappropriation theory plugged most of the insider trading gaps left open by Chiarella and Dirks's classical theory, and a clear statement from the Salman Court that joint tipper-tippee liability turns on deceptive breaches of loyalty (irrespective of a personal benefit) would plug other troubling gaps, including the gap that now exists for many instances of trading on selective disclosures that were deliberately leaked in violation of Regulation FD. But the insider trading and tipping prohibitions arising under Rule 10b-5 have not yet been construed broadly enough to encompass a number of additional instances of securities trading on the basis of material nonpublic information that has been obtained wrongfully. Securities trading on the basis of stolen information, for instance, may involve neither a fiduciary breach nor active deception, and thus only some computer hackers who trade securities and/or tip others to trade will be found liable under Rule 10b-5. (380) Moreover, as the Court itself acknowledged in O 'Hagan, its misappropriation theory does not extend to a fiduciary who brazenly discloses to the source that he plans to trade on the nonpublic information, or where the source is otherwise aware that a breach of loyalty is occurring. (381) Securities trading by non-fiduciary thieves (such as computer hackers) or brazen fiduciaries (such as an employee who discloses an intention to trade, and then quits) undermines investor confidence and compromises market integrity to the same extent as the self-serving use of the source's information by its agents or other fiduciaries. To be sure, the "fraud on the source" theory was entirely adequate for the purpose of reinstating O 'Hagan's Rule 10b-5 conviction, and the government "[did] not propose ... a theory of that breadth." (383) But the Court's observation that "[section] 10(b) is only a partial antidote to the problems it was designed to alleviate" (384) need not come to pass if the text of Section 10(b) and Rule 10b-5 support a broader insider trading theory that encompasses other instances of securities trading on wrongfully obtained information that fall outside of the Court's "deception by a fiduciary" paradigm.

In his dissenting opinion in Chiarella v. United States, (385) Chief Justice Burger articulated a workable "fraud on contemporaneous traders" theory of insider trading liability that would extend Rule 10b-5 to a litany of instances involving tips and trades that currently fit into neither the classical nor the misappropriation theory. The Chief Justice's theory, which was rooted in the Government's brief, (386) focused the Rule 10b-5 analysis on the propriety of a trader's silence about material nonpublic information in a securities transaction. Although he agreed with the majority that generally "neither party to an arm's length business transaction has an obligation to disclose information to the other unless the parties stand in some confidential or fiduciary relation," (387) the Chief Justice believed that the policies that underlie that general rule "should limit its scope" and that the common law rule of caveat emptor should in particular "give way when an informational advantage is obtained, not by superior experience, foresight, or industry, but by some unlawful means." (388)

Accordingly, the Chief Justice would have read "[section] 10(b) and Rule 10b-5 to encompass and build from this principle: a person who has misappropriated nonpublic information has an absolute duty to disclose that information or to refrain from trading." (389) The key support from the common law was the precedent in the British case of Phillips v. Homfray, (390) involving a real estate transaction in which the buyer obtained an informational advantage through an illegal trespass on the seller's property. The Homfray court refused to order specific performance of the contract, reasoning that the trespassing buyer's non-disclosure of material information pertaining to valuable mineral deposits amounted to a misrepresentation. In other words, the general rule of caveat emptor/vendor "gave way" when the informationally advantaged party employed an illegitimate "mode of acquiring knowledge." (391)

Although Chief Justice Burger did not explicitly describe his theory as such, because he had postulated a disclosure duty that ran to the shareholders on the opposite side of the securities transaction, the Rule 10b-5 violation that he contemplated would have resulted in a "fraud on contemporaneous traders." (392) Corporate insiders or other persons who communicate misappropriated or otherwise wrongfully obtained information to facilitate securities trading would likewise be violating Rule 10b-5 as a co-participant in the trader's fraud. The notion that contemporaneous traders are wronged by persons trading on misappropriated information is also what prompted Congress to provide the express private right of action in Section 20A of the Exchange Act. (393)

Support for the consolidation of the classical and misappropriation approaches into a unified and expanded theory can also be drawn from O 'Hagan itself, as well as from the Court's more recent decision in Chadbourne & Parke LLP v. Troice (394) As Justice Ginsburg underscored in O 'Hagan, the federal insider trading prohibition arising under Section 10(b) and Rule 10b-5 is directed at conduct that "undermines the integrity of, and investor confidence in, the securities markets." (395) And while under the Court's view it was a breach of loyalty that triggered that particular defendant's Rule 10b-5 disclosure obligation to the source of the information, Justice Ginsburg also emphasized that O'Hagan's fraud on the source "simultaneously harm[ed] members of the investing public." (396) In Troice, Justice Breyer not only reiterated O'Hagan's view that an insider trader's "victims [are] 'members of the investing public' harmed by the defendant's gaining of an 'advantageous market position' through insider trading." (397) But he also went further to categorize O'Hagan as a decision involving deception "that was 'material' to another individual's decision to 'purchase or sell' a statutorily defined 'security'" and in which "the relevant statements or omissions were material to a transaction in the relevant securities by or on behalf of someone other than the fraudster." (398) Justice Breyer's placement of O'Hagan within this line of "in connection with" cases may have foreshadowed a recognition on the part of the Court that investors trading opposite to a misappropriator are not only "harmed" and "victimized" but also deceived and defrauded in violation of Rule 10b-5.

My purpose in restating this "fraud on contemporaneous traders" theory is not to once again set out the research and arguments that I have discussed extensively elsewhere; (399) it is rather to underscore the advantages of a path that would consolidate the classical and misappropriation approaches into a unified and expanded insider trading theory. This "fraud on contemporaneous traders" theory would turn on whether a securities trader, with scienter, used wrongfully obtained information in a securities transaction. A reconceptualization such as this would be warranted now--even if it were not in O 'Hagan--because in the 19 years since that decision, the complementary liability theories for classical insiders and misappropriating outsiders have resulted in an insider trading jurisprudence that is unnecessarily complex. (400) Thus, a choice by the Salman Court to narrowly address the central issue of gratuitous tipping or to follow a path that merely clarifies joint tipper-tippee liability would be a lost opportunity.

A unified and expanded theory of insider trading that incorporates Chiarella, Dirks, and O'Hagan's fiduciary principles--but would not be cabined by them--would have much to commend it. Lower courts would no longer feel obliged to stretch fiduciary principles beyond recognition, as courts have done in dozens of cases that fall outside of fiduciary parameters but nonetheless involved securities trading on wrongfully obtained information. (401) A "fraud on contemporaneous traders" theory would, for example, be a better fit for securities trading by information thieves (such as computer hackers) who are strangers to the source of the stolen information (402) as well as to brazen fiduciaries (and their tippees) who trade with disclosure, but not with permission from the source. (403) In addition, the theory would extend to securities traders who knowingly or recklessly trade securities on the basis of material nonpublic information that has been selectively disclosed by corporate insiders in violation of Regulation FD, even if some of the issuer's executives had condoned those disclosures. (404) However, because a "fraud on contemporaneous traders" theory is triggered only by wrongful conduct that results in informational asymmetries, securities traders would still be able to capitalize on informational advantages obtained through legitimate searches for information and diligent research.

If the Salman Court were to embark down this path, its starting place, of course, would be with Section 10(b) and Rule 10b-5's text. That is, the Court would explain why Salman's conduct constituted deception in connection with the purchase or sale of securities: Salman defrauded the investors with whom he was trading when he remained silent about material nonpublic information that he knew or was reckless in not knowing had been misappropriated from an investment bank and its clients by his brother-in-law, Maher. (405) And Maher's guilty plea for securities fraud was clearly warranted because, as the original tipper who improperly disclosed his employer's and its client's confidential information, (406) Maher was a co-participant in Salman's fraud on contemporaneous traders. In addition, the Salman Court could explain that in framing the deception at issue as a "fraud on contemporaneous traders," the theory prohibits precisely the type of fraudulent conduct vis-a-vis investors that Congress intended Section 10(b) to reach. (407) The Court could likewise relate this unified and expanded theory of insider trading to its recent decision in Troice, and specifically to its recognition that a fraud occurs "in connection with" a securities transaction only if that fraud is "'material' to another individual's decision to 'purchase or s[ell]' a statutorily defined 'security.'" (408)

To assist lower courts in applying a Rule 10b-5 insider trading prohibition based on a fraud on contemporaneous traders, the Salman Court could also provide "guiding principles." The Court's greatest challenge would be in defining the scope of the wrongful conduct that would trigger the disclosure duty in a securities transaction. But the Court could seize upon general categories of wrongful conduct such as illegal acts (e.g., theft and bribery), tortious acts (e.g., deceit, conversion, trespass, or invasions of privacy), fiduciary breaches of loyalty, and breaches of confidentiality agreements. (409) Ultimately, however, the "fraud on contemporaneous traders" path would continue to develop through DOJ and SEC enforcement actions and in decisions by lower federal courts, but the greater uniformity and legitimacy from a unified and expanded theory would facilitate that development considerably.


The Supreme Court did not have insider trading especially in mind when it famously observed that a "peculiar blend of legislative, administrative, and judicial history ... surrounds Rule 10b-5." (410) Nevertheless, that observation fits the development of insider trading jurisprudence to a T. The federal insider trading and tipping prohibitions that arise under Section 10(b) and Rule 10b-5 reflect a unique collaboration dating back to the SEC's 1961 administrative order in Cady, Roberts, and continuing to the present with the Supreme Court's imminent decision in Salman v. United States.

As this Article recounts, the federal prohibitions of insider trading and tipping extended their farthest with the parity of information approach developed in Cady, Roberts and Texas Gulf Sulphur. But in the early 1980s, Chiarella and Dirks refused to recognize such a broad-based duty to forgo trading on material nonpublic information and narrowly premised the necessary disclosure obligation on a fiduciary relationship between the parties to the securities transaction. Then, in 1997, O'Hagan substantially expanded the insider trading prohibition to include undisclosed misappropriations of material nonpublic information by securities traders who owe duties of loyalty to an information's source. And in 2000, the SEC's concerns with informational asymmetries carried the day once again through Regulation FD's ban on selective disclosure, which unmoors certain types of tipping from the construct of fraud by imposing regulatory constraints on publicly traded securities issuers and their officials. Keenly aware of its own essential role in the collaboration, Congress passed insider trading legislation on two occasions soon after Dirks, and again more recently, with the SToCK Act. At each legislative juncture, Congress's support for insider trading and tipping prohibitions arising under Section 10(b) and Rule 10b-5 has been constant and unequivocal.

The Court's decision in Salman constitutes the next chapter in this peculiar blend of history. Looking beyond Dirks in tipper-tippee insider trading cases appropriately credits the profound changes effectuated by all three branches of the federal government and recognizes important changes in state law that bear on federal disclosure duties under Rule 10b-5. These post-Dirks developments have paved the way for a clearer doctrine of joint tipper-tippee liability that turns on whether a tipper has breached a duty of loyalty to the source of material nonpublic information, whether or not the tipper conveyed the information for personal gain.

But the Salman case presents an opportunity for the Court to re-conceptualize insider trading jurisprudence more generally--to render it more coherent and legitimate as well as better aligned with Congress's and the SEC's policy goals of promoting market integrity and investor confidence. The Court should clarify the law and better serve these objectives by consolidating its prior classical and misappropriation approaches into a new "fraud on contemporaneous traders" theory. Under this unified and expanded framework, a Rule 10b-5 violation would occur when a person knowingly or recklessly uses wrongfully obtained material nonpublic information in connection with a securities transaction, or wrongfully communicates such information, regardless of whether the trader or tipper violated a fiduciary duty that was owed to the shareholders of the issuer or the source of the information.

(1.) THE BIG CHILL (Columbia Pictures Corp. 1983). We know from the film that the tipping resulted in a securities transaction: Harold also shared Running Dog's confidential information with Alex, another close friend (whose tragic death reunited the seven college friends who gathered for his funeral). During their jog, Harold told Nick that Alex had purchased Running Dog stock on the basis of his tip.

(2.) United States v. Newman, 773 F.3d 438 (2d Cir. 2014).

(3.) Id. at 452.

(4.) Id.

(5.) Id.

(6.) Dirks v. SEC, 463 U.S. 646 (1983).

(7.) Chiarella v. United States, 445 U.S. 222 (1980).

(8.) 15 U.S.C. [section] 78j(b) (1934).

(9.) 17 C.F.R. [section] 240.10b-5 (1951).

(10.) Dirks, 463 U.S. at 660.

(11.) Id. at 663.

(12.) Id. at 664.

(13.) See, e.g., United States v. Gansman, 657 F.3d 85, 90-97 (2d Cir. 2011) (affirming conviction under Rule 10b-5 where defendant-attorney illegally tipped his girlfriend about information pertaining to clients at Ernst & Young); United States v. Grossman, 843 F.2d 78, 84-87 (2d Cir. 1988) (affirming conviction under Rule 10b-5 where defendant-law firm associate both traded on the basis of confidential client information and tipped relatives who subsequently traded).

(14.) See, e.g., SEC v. Materia, 745 F.2d 197, 199-204 (2d Cir. 1984) (affirming tipper-defendant's liability under Rule 10b-5 for his disclosure of information misappropriated from his printer-employer, even though there was insufficient proof that tippee-wife was aware that she had traded on misappropriated information).

(15.) See, e.g., United States v. McGee, 763 F.3d 304, 308-22 (3d Cir. 2014) (affirming judgment upholding conviction of defendant who traded and tipped a friend based on material nonpublic information that was entrusted to him by the corporate executive whom he had sponsored at Alcoholics Anonymous meetings); SEC v. Rocklage, 470 F.3d 1, 14 n.4 (1st Cir. 2006) (allegations in complaint stated a claim under Rule 10b-5 that the wife of a corporate executive misappropriated information from her husband in order to give her brother a "gift of information").

(16.) United States v. O'Hagan, 521 U.S. 642, 652 (1997) (emphasizing that the classical and misappropriation theories of insider trading are "complementary" because they each address "efforts to capitalize on nonpublic information through the purchase or sale of securities").

(17.) United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014) (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)).

(18.) Id.

(19.) Id.

(20.) Id.

(21.) Id.

(22.) United States v. Conradt, No. 12 Cr. 887, 2015 WL 480419 (S.D.N.Y. Jan. 22, 2015). But see SEC v. Payton, 97 F. Supp. 3d 558, 563-65 (S.D.N.Y. 2015) (holding that the SEC stated a valid claim for securities fraud under Rule 10b-5 in a civil enforcement action related to the same tipping at issue in Conradt).

(23.) See Phyllis Diamond, Newman Topples Insider Charges Against Defendants in IBM Merger Case, 47 SEC. REG. & L. REP. 202 (Jan. 29, 2015) (quoting a letter by the U.S. Attorney for the Southern District of New York requesting the court to dismiss the indictments because Newman "'creates a novel evidentiary bar for tipper benefit and tippee knowledge of such a benefit, that the Government cannot now meet'").

(24.) See Greg Stohr & Patricia Hurtado, Insider Cases Imperiled as High Court Spurns Appeal, 47 SEC. REG & L. REP. 1929 (Oct. 12, 2015) (reporting that Newman's ruling "threatens at least 10 convictions" and has "raised the bar for prosecutions stemming from information passed by a corporate insider to a friend, relative or business associate"); Patricia Hurtado, Insider Traders Who May Find Hope in Supreme Court Move: List, 47 SEC. REG & L. REP. 1930 (Oct. 12, 2015) (identifying prosecutions impacted by the Newman ruling).

(25.) Chris Dolmetsch, Rajat Gupta's Conviction to Get New Review, 48 SEC. REG. & L. REP. 307 (Feb. 15, 2016). Gupta, who is now out of prison after having served a term of 19 months, id., asserts that he was found guilty without a finding by the jury that his tips to billionaire hedge fund manager Raj Rajaratnam were part of "'an agreed-upon exchange of tips for consequential benefits.'" Patricia Hurtado, Ex-Goldman Director Gupta Says Insider Conviction Should Be Tossed, 47 SEC. REG. & L. REP. 540 (Mar. 16, 2015) (quoting Gupta's attorney Gary Naftalis).

(26.) United States v. Salman, 792 F.3d 1087 (9th Cir. 2015).

(27.) Id. at 1089-90.

(28.) Id.

(29.) Id. at 1092 (quoting Dirks v. SEC, 463 U.S. 646, 664 (1983)).

(30.) Id.

(31.) See, e.g., United States v. Parigian, 824 F.3d 5, 15-16 (1st Cir. 2016) (finding that the tipper and tippee were "reasonably good friends" and that the tipper requested and received a golfing outing and other luxury entertainment in "return for the tips"); United States v. McPhail, 831 F.3d 1, 11 (1st Cir. 2016) (finding that the tipper received "concrete benefits" including "a free dinner, wine, and a massage parlor visit" as well as subtle benefits such as "the group's general gratitude for his largesse").

(32.) Brief of Amicus Curiae Law Professors Stephen Bainbridge, M. Todd Henderson, and Jonathan Macey in Opposition to the United States of America's Petition for Rehearing or Rehearing En Banc at *1, United States v. Newman (2014), (No. 13-1837-cr(L)), 2015 WL 1064409.

(33.) Id. at *9.

(34.) A.C. Pritchard, Dirks and the Genesis of Personal Benefit, 68 SMU L. REV. 857, 861 (2015).

(35.) Id. at 874.

(36.) Michael Perino, The Gift of Inside Information, N.Y. TIMES: DEALBOOK (Dec. 12, 2014), (pointing out that "[t]he essence of a 'gift' is that it is gratuitous--a true gift is made with no expectation of anything in return").

(37.) J. Robert Brown Jr., US v. Newman and the Rewriting of the Law of Insider Trading (Part 1), RACETO THEBOTTOM.ORG (Mar. 2, 2015, 6:00 AM), -rewriting-of-the-law-of-insider-trading.html (observing that most tips to friends and relatives "will not be motivated by the potential for pecuniary gain," and criticizing Newman for essentially eliminating "from the prohibition on insider trading the exchange of information by family members").

(38.) James D. Cox, Giving Tippers a Pass: US v. Newman, CLS BLUE SKY BLOG (Jan. 27, 2015), (lamenting that Newman "pours gas onto [a] raging fire" because "corporate insiders are not very good about keeping secrets [and] their tippees are delighted that they do not").

(39.) Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 762 (1975) (Blackmun, J., dissenting).

(40.) See infra text accompanying note 235 (quoting congressional concerns about the harms from insider trading); infra text accompanying note 145 (referencing O'Hagan's observation that promoting investor confidence and market integrity are "animating" purposes of the Exchange Act).

(41.) Salman v. United States, 792 F.3d 1087 (9th Cir. 2015), cert. granted, 84 U.S.L.W. 3405 (U.S. Jan. 19, 2016) (No. 15-628).

(42.) See infra note 134 (quoting the first question presented in Petition for a Writ of Certiorari at *i, Salman v. United States, 792 F.3d 1087 (9th Cir. 2015) (No. 15-628), 2015 WL 7180648, (filed Nov. 10, 2015)).

(43.) United States v. O'Hagan, 521 U.S. 642, 652, 682 (1997).

(44.) Insider Trading Sanctions Act of 1984 (ITSA), Pub. L. No. 98-376, 98 Stat. 1264 (1984); Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), Pub. L. No. 100-704, 120 Stat. 4677 (1988); Stop Trading on Congressional Knowledge (STOCK) Act of 2012, Pub. L. No. 112-105, 176 Stat. 291 (2012).

(45.) 17 C.F.R. [section] 243.100 (2011).

(46.) In re Walt Disney Co. Derivatives Litig., 906 A.2d 27 (Del. 2006); Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006). In addition, although it can hardly be categorized as a development in its own right, the Court's decision in Bateman Eichler, Hill Richards, Inc. v. Berner, 474 U.S. 299 (1985), provides valuable contemporaneous insight into how the Court construed the then-recent test for joint tipper-tippee liability in the course of deciding whether to recognize an in pari delicto (unclean hands) defense, which would have barred plaintiff investors from recovering under Rule 10b-5 the damages they incurred from purchasing securities on the basis of what amounted to "false tips" by the defendants. See infra text accompanying notes 89-94 (discussing Bateman Eichler).

(47.) See generally Donna M. Nagy, Insider Trading and the Gradual Demise of Fiduciary Principles, 94 IOWA L. REV. 1315, 1369-78 (2009) [hereinafter Nagy, Fiduciary Principles]; Donna M. Nagy, Reframing the Misappropriation Theory of Insider Trading Liability: A Post-O'Hagan Suggestion, 59 OHIO ST. L.J. 1223 (1998) [hereinafter Nagy, Reframing Misappropriation].

(48.) See Chiarella v. United States, 445 U.S. 222, 240-45 (1980) (Burger, C.J., dissenting); see also infra note 392 (observing that Justices Brennan, Blackmun, and Marshall agreed with the Chief Justice's view of the disclosure obligation).

(49.) See infra text accompanying notes 397-398 (analyzing Justice Breyer's multiple citations to O'Hagan in his majority opinion in Chadbourne & Park LLP v. Troice, 134 S. Ct. 1058 (2014)).

(50.) See infra Part VII.B.

(51.) United States v. O'Hagan, 521 U.S. 642, 655 n.6 (1997).

(52.) See infra text accompanying notes 144-49, 210, 235 (quoting O'Hagan and Exchange Act legislative history).

(53.) See infra Part IV.

(54.) Indeed, while the Court's classical and misappropriation approaches can be set out in a few sentences, they have nonetheless resulted in a jurisprudence that is unnecessarily complex. See Peter J. Henning, What's So Bad About Insider Trading Law?, 70 BUS. LAW. 751, 757 (2015) (lamenting that insider trading law has grown "largely in fits and starts, rather than through a clear progression reflecting a coherent conception of the many aspects that make up a violation"); see also Thomas Lee Hazen, Identifying the Duty Prohibiting Outsider Trading on Material Nonpublic Information, 61 HASTINGS L.J. 881, 883 (2010) (observing that there are "hundreds of decisions grappling" with Rule 10b-5's application to insider trading, and emphasizing that many of these decisions "are confusing and inconsistent with one another").

(55.) United States v. Newman, 773 F.3d 438, 442-43 (2d Cir. 2014).

(56.) Id. at 443.

(57.) Id.

(58.) Id.

(59.) Id.

(60.) Newman, 773 F.3d at 443.

(61.) Id. at 452.

(62.) Id.

(63.) See Ethan J. Lieb, Friendship & the Law, 54 UCLA L. REV. 631, 638 (2007) (while "the vast majority of us know [our family members], figuring out who constitutes a friend--and when friendship starts and ends--may be a harder task"). Whereas the government asserted that the Dell insider and the securities analyst were "friends," the defendants contended that that were simply acquaintances who were "not that close." Reply Brief of Defendant-Appellant Todd Newman at 41, United States v. Newman, 773 F.3d 438 (2d Cir. 2014).

(64.) Newman, 773 F.3d at 443.

(65.) Id. at 452.

(66.) Superseding Indictment, United States v. Newman, S2 12 Cr. 121 (RJS), August 28, 2012. Paragraph 8 of the Twelve-Count Superseding Indictment charged that: "[t]he Inside Information ... was obtained in violation of: (i) fiduciary and other duties of trust and confidence owed by the employees of the Technology Companies to their employers; (ii) expectations of confidentiality held by the Technology companies; (iii) written policies of the Technology Companies regarding the use and safekeeping of confidential business information; and (iv) agreements between the Technology Companies and their employees to maintain information in confidence." Id. [paragraph]8.

(67.) See Cady, Roberts & Co., 40 S.E.C. 907, No. 8-3925 at * 4 (1961) (holding that the obligation to disclose or abstain from trading rests on two principal elements: "first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing").

(68.) SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968) (holding that "anyone in possession of material inside information must either disclose it to the investing public ... [or] must abstain from trading in or recommending the securities concerned").

(69.) Chiarella v. United States, 445 U.S. 222 (1980).

(70.) Id. at 228 (emphasis added) (quoting RESTATEMENT (SECOND) OF TORTS [section] 551(2)(a) (AM. LAW. INST.1977)).

(71.) See id. at 226 (observing that, in Cady, Roberts, "[t]he SEC took an important step in the development of [section] 10(b)").

(72.) 15 U.S.C. [section] 78j(b) (1934).

(73.) The SEC adopted Rule 14e-3 in 1980, subsequent to the securities transactions at issue in Chiarella. Once "substantial steps" toward a tender offer have been taken, the rule prohibits trading by any person in possession of material nonpublic information relating to that tender offer when that person knows or has reason to know that the information is nonpublic and was received from the offeror, the target, or any person acting on behalf of either the offeror or the target. See 17 C.F.R. [section] 240.14e-3 (2016); see also United States v. O'Hagan, 521 U.S. 642, 672-73 (1997) (ruling that Rule 14e-3 qualifies as a "means reasonably designed to prevent" fraud in connection with tender offers within the meaning of Section 14(e) of the Exchange Act).

(74.) Dirks v. SEC, 463 U.S. 646 (1983).

(75.) Id. at 649.

(76.) See id. at 650 (observing that when Equity Funding's negative news hit the market, its stock price dropped from $26 to $15 per share).

(77.) Id.

(78.) Id. at 663.

(79.) Dirks, 463 U.S. at 663.

(80.) Id. at 664.

(81.) Id. at 660.

(82.) Id.

(83.) Id. at 659; see also id. at 662 (concluding that "[a]bsent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach"). Although Dirks stated that a disclosure duty attaches when the tippee "knows or should know that there has been a breach," for a tippee's securities trading to violate Rule 10b-5, there must also be a finding that the tippee acted with scienter. Accordingly, with a view to the scienter requirement, courts often phrase the disclosure obligation as one generated when the tippee knows or is reckless in not knowing that the insider breached a fiduciary duty by disclosing information. See Donald C. Langevoort, "Fine Distinctions" in the Contemporary Law of Insider Trading, 2013 COL. BUS. L. REV. 429, 455-56 (observing that "[t]he 'knows or should know' standard in Dirks has always been hard to explain" and that courts often "use recklessness here instead"). For an argument that tippee liability requires a mental state beyond recklessness, see Joan MacLeod Heminway, Willful Blindness, Plausible Deniability, and Tippee Liability: SAC, Steve Cohen, and the Court's Opinion in Dirks, 15 TRANSACTIONS: TENN. J. BUS. L. 47, 54-55 (2013).

(84.) Dirks, 463 U.S. at 658 n.17; see also id. at 659 (emphasizing that the "information that the analysts obtain normally may be the basis for judgments as to the market worth of a corporation's securities" and that "[i]t is the nature of this type of information, and indeed of markets themselves, that such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally").

(85.) Id. at 658.

(86.) Id. at 658 n.18.

(87.) See Merritt B. Fox, Regulation FD and Foreign Issuers: Globalization's Strains and Opportunities, 41 VA. J. INT'L L. 653, 660 (2001) (observing that "[t]he Court felt that the analyst interview is a socially valuable practice that would be chilled by a Rule 10b-5 prohibition against any selective revelations of material non-public information that might occur during such an interview").

(88.) Dirks, 463 U.S at 654 (quoting In re Merrill Lynch, Inc., 43 S.E.C. 933, 936 (1968)).

(89.) Bateman Eichler v. Berner, 472 U.S. 299 (1985).

(90.) The Bateman Eichler defendants were a securities brokerage and the president of the corporation that had issued the stock. The plaintiffs alleged that these defendants had fraudulently induced their stock purchases by communicating false and misleading information about the corporation under the ruse that they were conveying reliable, material nonpublic information. See id. at 301-02. The plaintiffs admitted in their complaint that they purchased the stock "on the premise that their broker "'was privy to certain information not otherwise available to the general public.'" Id. at 302 (quoting complaint).

(91.) The Court had assumed, for purposes of its decision, that the defendants were correct in viewing the plaintiffs as "tippees" who had traded in violation of Rule 10b-5. But in the Court's view, there were "important distinctions between the relative culpabilities of tippers, securities professionals, and tippees in these circumstances," based in part on the fact that insider-tippers typically defraud not only the shareholders on the other side of a tippee's transaction but also the corporation that entrusted the insiders with the material nonpublic information. See id. at 313-14; see also infra text accompanying notes 184-186 (discussing culpability issues).

(92.) Bateman Eichler, 472 U.S. at 310 n.21 (quoting Dirks, 463 U.S. at 663).

(93.) Id. (emphasis added).

(94.) Id. (emphasis added).

(95.) See infra text accompanying notes 227-34 (discussing the Insider Trading Sanctions Act of 1984 and the House Committee on Commerce and Energy's mandate for a follow-up study by the SEC).

(96.) United States v. Newman, 773 F.3d 438, 444 (2d Cir. 2014). The district court instructed that the jury must consider "'whether the [G]overnment has proven beyond a reasonable doubt that [the Dell and NVIDIA insiders] intentionally breached that duty of trust and confidence by disclosing material nonpublic information for their own benefit.'" Id. (quoting Tr. 4030).

(97.) Id. at 451-52.

(98.) Id. at 452.

(99.) Id.

(100.) Newman, 773 F.3d at 452.

(101.) Id.

(102.) Id.

(103.) See supra note 93 and accompanying text (quoting Bateman Eichler). In addition, the Newman court made no attempt to reconcile its tangible benefit requirement with the Second Circuit's contrasting statement in SEC v. Warde, 151 F.3d 42, 48 (2nd Cir. 1998) (concluding that the government "need not show that the tipper expected or received a specific or tangible benefit in exchange for the tip").

(104.) Newman, 773 F.3d at 444 (quoting jury instructions at Tr. 4033:14-22).

(105.) Id. at 447 (citing Chiarella v. United States, 445 U.S. 222, 233 (1980)).

(106.) Id. at 447-48 (emphasis in original).

(107.) Id. at 448.

(108.) Id. at 453.

(109.) Newman, 773 F.3d at 455.

(110.) See United States v. Newman, No. 13-1837L, 2015 WL 1954058 (2d Cir. April 3, 2015) (denying the government's petition for a panel rehearing, or in the alternative, for a rehearing en banc).

(111.) U.S. Petition for a Writ of Certiorari at i, United States v. Newman, 136 S. Ct. 242 (2015) (No. 15-137). The sole question presented was: "whether the court of appeals erroneously departed from this Court's decision in Dirks by holding that liability under a gifting theory requires '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.'" Id.

(112.) Id. at 18-19. The government's petition did not seek review of the Second Circuit's ruling concerning the insufficiency of evidence pertaining to the defendants' knowledge of the tippers' personal benefits. Several commentators questioned this tactical move and predicted that the Court would deny the government's petition because it amounted to a request for an advisory opinion on the personal benefit issue. See Roger Parloff, Why the Supreme Court Might Not Hear a Crucial Insider Trading Case, FORTUNE (Sept. 23, 2015), (observing that "federal courts aren't supposed to render 'advisory opinions' ... even if such an opinion might give helpful guidance in future cases").

(113.) United States v. Newman, 773 F.3d 438, 446 (2d Cir. 2014), cert. denied, 136 S. Ct. 242 (2015).

(114.) See Richard Hill, SEC Still Bringing Insider Trading Cases Despite Newman Loss, 47 SEC. REG. L. REP. 2397 (Dec. 21, 2015) (quoting the SEC's Associate Director of Enforcement statement that after Newman, the agency is having to "work harder to establish a relationship that helps satisfy the court's personal benefit standard").

(115.) United States v. Salman, 792 F.3d 1087, 1089 (9th Cir. 2015).

(116.) Id. Notably, Citigroup represented the acquiring company in three of the four impending acquisitions that generated the investment banker's gratuitous tips about the securities of the acquisition targets. See Brief for Petitioner at 6, 12-15, Salman v. United States, (No. 15-628), 2106 WL 2732058 (filed May 6, 2016) (stating that Salman was convicted of four substantive counts of insider trading, which pertained to his trades in securities of Biosite Incorporated (with Citigroup representing the acquiring company) and United Surgical Partners International, Inc. (with Citigroup representing a private equity firm that was interested in buying out the other USPI shareholders); see also id. at 12 (observing that Salman was also convicted of a single count of conspiracy to engage in insider trading, which pertained to his securities purchases in USPI and Biosite as well as in Andrx Corporation (with Citigroup representing the acquirer) and Bone Care International, Inc (with Citigroup representing the acquisition target in the company's sale to Genzyme). Thus, only a fraction of the petitioner's illegal profits resulted from a transaction in which Citigroup represented, and thereby owed fiduciary-like duties to, the target company's shareholders--the lion's share of the illicit gains resulted from "outsider" tipping and trading. See Brief of Respondent United States at 6, Salman v. United States (No. 78-15628), 2016 WL 4088380 (filed Aug. 1, 2016) (observing that nearly $1 million of petitioner's profits came from the investment banker's "tip that Biosite was about to be acquired by a Citigroup client").

(117.) Salman, 792 F.3d at 1089 (quoting testimony introduced at Salman's trial).

(118.) Id.

(119.) Id.

(120.) Salman, 792 F.3d at 1089 (observing that the Kara and Salman families were very close--in 2003, Maher became engaged to Salman's sister and they were married in 2005).

(121.) Id.

(122.) Id. at 1092 n.4.

(123.) Id. at 1092 (quoting Dirks v. SEC, 463 U.S. 646, 664 (1983)).

(124.) Id.

(125.) Salman, 792 F.3d at 1093 (quoting United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014)).

(126.) Id.

(127.) Id. (quoting Dirks, 463 U.S. at 663).

(128.) Id. at 1094.

(129.) Id.

(130.) Salman v. United States, 792 F.3d 1087, petition for cert., 2015 WL 7180648, at *2 (9th Cir. Nov. 10, 2015) (No. 15-628).

(131.) Id.

(132.) Brief for the United States in Opposition, at *9, Salman v. United States, 792 F.3d 1087 (9th Cir. Dec. 14, 2015) (No. 15-628), 10872015 WL 8959421.

(133.) Salman v. United States, No. 15-628, 2016 WL 207256 (cert. granted, Jan. 19, 2016).

(134.) Id. Question 1 in the petition reads in full: "[d]oes 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, 773 F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (U.S. Oct. 5, 2015), or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?" Petition for a Writ of Certiorari, supra note 130, at i.

(135.) But see infra note 174 (discussing unsuccessful attempts by the DOJ and SEC to convince courts that the personal benefit test applies only in classical cases and not to tipper-tippee cases brought under a misappropriation theory).

(136.) United States v. O'Hagan, 521 U.S. 642 (1997).

(137.) In addition to Justices Breyer and Kennedy, the three others in the O'Hagan majority were Justices Sandra Day O'Connor, David Souter, and John Paul Stevens. Justice Clarence Thomas authored a dissenting opinion in which Chief Justice William Rehnquist joined and Justice Antonin Scalia authored a separate dissenting opinion.

(138.) O'Hagan, 521 U.S. at 653-54.

(139.) Id. at 652.

(140.) Id. at 655.

(141.) Id. at 652; see also id. at 664 (quoting Carpenter v. United States, 484 U.S. 19, 27 (1987) (observing that "[a] company's confidential information ... qualifies as property to which the company has a right of exclusive use" and that "[t]he undisclosed misappropriation of such information, in violation of a fiduciary duty ... constitutes fraud akin to embezzlement--'the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another'").

(142.) O'Hagan, 521 U.S. at 655-56.

(143.) Id. The O'Hagan Court recognized, however, that "full disclosure forecloses liability under the misappropriation theory." Id. at 655. That is, "if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no 'deceptive device' and thus no [section] 10(b) violation." Id.

(144.) Id. at 659.

(145.) O'Hagan, 521 U.S. at 658 (observing that the misappropriation theory was "well-tuned to an animating purpose of the Exchange Act").

(146.) See A.C. Pritchard, United States v. O'Hagan: Agency Law and Justice Powell's Legacy for the Law of Insider Trading, 78 B.U. L. REV. 13, 43 (1998) (observing that "[p]olicy concerns and congressional intent, not the common law of deceit followed by Powell in Chiarella and Dirks, guided the Court's decision in O'Hagan"); Stephen M. Bainbridge, Insider Trading Regulation: The Path Dependent Choice Between Property Rights and Securities Fraud, 52 SMU L. REV. 1589, 1648 (1999) (depicting O'Hagan as an "arguable revival of the long-discredited equal access theory of liability").

(147.) See supra text accompanying notes 67-68 (discussing the SEC's decision in Cady, Roberts and the Second Circuit's decision in Texas Gulf Sulphur).

(148.) O'Hagan, 521 U.S. at 658.

(149.) Id. at 659.

(150.) Id. at 666. Three years after O'Hagan, the SEC codified the Court's complementary approaches to insider trading liability in Rule 10b5-1, which sets out a general principle that the "manipulative and deceptive devices" prohibited by Section 10(b) and Rule 10b-5 shall include, among other things, securities trading "on the basis of material nonpublic information ... in breach of a duty of trust or confidence that is owed ... to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information." 17 C.F.R. [section] 240.10b5-1(a) (2016).

(151.) Pritchard, supra note 146, at 32-34.

(152.) Carpenter v. United States, 484 U.S. 19 (1987). The Wall Street Journal reporter in Carpenter had misappropriated confidential information from his "Heard on the Street" columns by tipping others to trade and secretly sharing in the profits. Id. at 22-23.

(153.) Pritchard, supra note 146, at 33.

(154.) See id. at 58 (reprinting Justice Lewis F. Powell, Jr.'s Draft Dissent from Denial of Certiorari, Carpenter v. United States (Dec. 10, 1986)). According to Justice Powell, "the duty of an individual to his employer alone is insufficient to support an action under Rule 10b-5." Id. Thus, Section 10(b) "'must instead focus on the petitioner's relationship with the sellers of the ... securities.'" Id.

(155.) See supra note 137.

(156.) United States v. O'Hagan, 521 U.S. 642, 691 (1997) (Thomas, J., Rehnquist, C.J., dissenting); see also id. at 679 (Scalia, J. dissenting) (contending that under the "principle of lenity," Section 10(b)'s text "must be construed to require the manipulation or deception of a party to a securities transaction").

(157.) Id. at 691 (Thomas, J., Rehnquist, C.J., dissenting).

(158.) United States v. Falcone, 257 F.3d 226 (2d Cir. 2001).

(159.) Id. at 233.

(160.) Id. (citing United States v. McDermott, 245 F.3d 133 (2d Cir. 2001)) (finding sufficient evidence to support jury's conviction of a nontrading tipper, an investment banking executive, who disclosed confidential information for trading purposes to a woman with whom he was having an affair).

(161.) Id. at 233.

(162.) Id. at 234.

(163.) Falcone, 257 F.3d at 234.

(164.) United States v. Salman, 792 F.3d 1087, 1092 n.4 (9th Cir. 2015).

(165.) United States v. Newman, 773 F.3d 438, 449 (2d Cir. 2014).

(166.) See id. (citing United States v. Chestman, 947 F.2d 551, 578 (2d Cir. 1991) (Winter, J., concurring in part and dissenting in part). As his opinion in Chestman makes clear, Judge Winter's views were influenced substantially by then-Professor, now-Judge Frank Easterbrook's scholarship. See Chestman, 947 F.2d at 572, 576 (crediting Easterbrook for the development of the "business-property rationale for banning insider trading" and quoting from his article, Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 SUP. CT. REV. 309); see also JONATHAN R. MACEY, INSIDER TRADING: ECONOMICS, POLITICS, AND POLICY 67 (1991) ("[T]he only conceivable justification for banning insider trading is that such trading involves the theft of valuable corporate property from its rightful owner.").

(167.) See Roberta S. Karmel, Outsider Trading on Confidential Information--A Breach in Search of a Duty, 20 CARDOZO L. REV. 83, 113 (1998) ("The easiest criticism of the property rights theory is that when Congress passed and subsequently amended the Exchange Act, it was concerned about fairness and the protection of investors, not the protection of property rights in information....").

(168.) Newman, 773 F.3d at 449 (quoting Chestman, 947 F.2d at 578) (Winter, J., concurring in part and dissenting in part). A property rights rationale for the regulation of insider trading also has roots in the Second Circuit's decision that first endorsed a misappropriation alternative to Chiarella's classical theory: United States v. Newman, 664 F.2d 12 (2d Cir. 1981), aff'd after remand, 722 F.2d 729 (2d Cir. 1983), cert. denied, 464 U.S. 863 (1983). See Jonathan R. Macey, From Fairness to Contract: The New Direction of the Rules against Insider Trading, 13 HOFSTRA L. REV. 9, 27 n.96 (1984) (noting that the Second Circuit's endorsement of the misappropriation theory "relie[d] squarely on a property theory to find liability under [Rule] 10b-5").

(169.) United States v. O'Hagan, 521 U.S. 642, 659 (1997).

(170.) Newman, 773 F.3d at 444; see also supra text accompanying note 96 (quoting jury instructions).

(171.) O'Hagan, 521 U.S. at 689.

(172.) DONALD C. LANGEVOORT, INSIDER TRADING: REGULATION, ENFORCEMENT & PREVENTION [section] 6.1 (West vol. 18, 2015); see also WILLIAM K.S. WANG & MARC I. STEINBERG, INSIDER TRADING 492 (3d ed. 2010) ("[I]n most instances, both the Commission and private plaintiffs could recast a classical special relationship cases as involving misappropriation."). There is at least one, albeit rare, scenario whereby the classical theory would capture insider trading that would not also violate the misappropriation theory: although an insider's full disclosure to the corporation would negate liability under the misappropriation theory, it would not absolve the "classical" disclosure duties owed to the shareholders on the other side of the insider's securities transaction. Of course, to provide defendants with fair notice of the claims against them, the government should be clear in articulating its litigation position. See SEC v. Bauer, 42 F. Supp. 3d 923, 930 (N. D. Ill. 2014) (granting defendant's motion for summary judgment in part because the SEC's initial decision to frame its case solely under the classical theory--and its failure to raise the misappropriation theory at any time "in the eight years that [the] case remained pending"--precluded the SEC from substituting theories), on remand from, 723 F.3d 758 (7th Cir. 2013). Although both Bauer opinions suggest in places that the misappropriation theory applies exclusively to outsiders, no court has held that explicitly. See LANGEVOORT, supra, at [section] 6.1 (stating that "[t]he better reading of the case law is that either or both theories may apply, so long as the required elements fit the case").

(173.) United States v. Newman, 773 F.3d 438, 446 (2d Cir. 2014) (referencing SEC v. Obus, 693 F.3d 276, 285-86 (2d Cir. 2012)).

(174.) Although the government has argued on occasion that Dirks's personal benefit test applies only in classical theory cases, no post-O'Hagan court has accepted that argument. See SEC v. Obus, 693 F.3d 276, 286 (2d Cir. 2012) (holding that Dirks's personal benefit test for joint tipper-tippee liability also "governs in a misappropriation case"); see, e.g., SEC v. Yun, 327 F.3d 1263, 1279-80 (11th Cir. 2003) (requiring the government to "prove that a misappropriator expected to benefit from the tip" and observing that "O'Hagan explicitly states or implicitly assumes that a misappropriator must gain personally from his trading on the confidential information"). Both the DOJ and SEC attempted to resurrect that argument in the wake of Newman, but it was flatly rejected. See United States v. Salman, 792 F.3d. 1087, 1092 n.4 (9th Cir. 2015) (ruling that the personal benefit test applies in misappropriation theory cases "like the instant case"); SEC v. Payton, 97 F. Supp. 3d 558, 563 (S.D.N.Y. Apr. 6, 2015) (acknowledging that the SEC's argument may have "abstract merits," but adhering to Obus and Newman's conclusion that the elements of tipping liability are identical, regardless of whether the tipper's duty arises under the classical or the misappropriation theory).

(175.) SEC v. Maio, 51 F.3d 623, 633 (7th Cir. 1995) ("After all, [the tipper] did not have to make any disclosure, so why tell [the initial tippee] anything?").

(176.) Id. at 633.

(177.) Id. at 632 (citing Dirks and emphasizing the district court's finding that the tipper's disclosure "was an improper gift of inside

information to ... a trading friend"). Newman's demand for evidence of a "meaningfully close personal relationship" also imposes a higher evidentiary standard for gift-giving than SEC Rule 10b5-2 imposes to justify a finding of a "relationship of trust or confidence." That is, Rule 10b5-2 provides a non-exclusive list of three situations in which a person has "a duty of trust or confidence" for purposes of the misappropriation theory: (1) when the person receiving the information "agrees to maintain [that] information in confidence;" (2) when the persons involved in the communication "have a history, pattern, or practice of sharing confidences" that results in a reasonable expectation of confidentiality; and (3) a rebuttable presumption is provided when the person receives such information from a "spouse, parent, child or sibling." 17 C.F.R. [section] 240.10b5-2 (2016). Newman's exacting criteria for gratuitous tipping is instead reminiscent of the high hurdles some states place upon shareholders seeking to challenge the independence of a director. See Lisa M. Fairfax, The Uneasy Case for the Inside Director, 96 IOWA L. REV. 127, 147-48 (2010) (observing that "even lengthy friendships or professional interactions among directors are not alone given serious consideration when analyzing a director's independence").

(178.) The case that is closest is SEC v. Maxwell, 341 F. Supp. 2d 941 (S.D. Ohio 2004), a classical theory decision which granted the defendant's motion for summary judgment. The court placed the burden on the SEC to show precisely how and why a corporate executive stood "to gain" from disclosing highly confidential information about an upcoming merger to his barber, whom he had known for fifteen years. Id. at 948-49. Although the court acknowledged that "the requisite personal benefit may be shown by the intent to provide a gift to benefit the tippee," it nonetheless concluded that "there is absolutely no evidence that [the insider] had any reason or intent to give a gift--especially a gift of this magnitude to [his barber]." Id. at 949. The court seemed to place much emphasis on the "parties relative stations in life." Id. at 948. But had Maxwell focused instead on the lack of legitimate reasons for a corporate executive's disclosure of confidential merger-related information to his barber, the court may well have found the SEC's asserted inference of gift-giving more compelling. In addition, Maxwell's result could have been different had the court considered the corporate executive's "'self-regarding gain,'" which Professor Sung Hui Kim defines as "'supererogatory gain to the individual or her relatives, friends, or acquaintances.'" Sung Hui Kim, Insider Trading As Private Corruption, 61 UCLA L. REV. 928, 934 (2014). A gain is supererogatory if it is "neither part of the explicit compensation allocated to the individual nor culturally viewed as an acceptable or unavoidable perquisite of the role." Id. at 956.

(179.) See Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 313 (1985) (observing that while an insider "shares responsibility" in the tippee's Rule 10b-5 fraud against individual shareholders, "the insider, in disclosing such information, also frequently breaches fiduciary duties toward the issuer itself").

(180.) United States v. O'Hagan, 521 U.S. 642, 653 (1997); see supra note 96 (quoting the Newman trial court's instruction that required the jury to determine whether the Dell and NVIDIA insiders had "intentionally breached [a] duty of trust and confidence by disclosing material, nonpublic information for their own benefit").

(181.) See supra note 172 (citing sources).

(182.) A similar principle should apply to juries and courts: absent a finding that an insider has misappropriated the corporation's information for the purpose of facilitating an outsider's securities trading, there should be no Rule 10b-5 liability for the tippee's trading. See Nagy, Fiduciary Principles, supra note 47, at 1347-48 (criticizing United States v. Evans, 486 F.3d 315 (7th Cir. 2007), a decision in which the court affirmed the criminal conviction of a tippee who was retried after the insider-friend who allegedly tipped him had been acquitted in the previous trial).

(183.) See supra note 141 (referencing O'Hagan's citation to Carpenter v. United States, 484 U.S. 19, 27 (1987)).

(184.) United States v. Newman, 773 F.3d 438, 443 (2d Cir. 2014). The NVIDIA tipper ultimately agreed to settle an SEC enforcement action that charged him with violations of Section 10(b) and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. Without admitting or denying the allegations, he agreed to be permanently enjoined from future violations of these provisions and agreed to pay a $30,000 penalty and be barred from serving as an officer or director of a public company for five years. See Press Release 2014-82, SEC, SEC Charges Technology Company Insider in California with Tipping Confidential Information Exploited by Hedge Funds (Apr. 23, 2014), The NVIDIA tipper also consented to an order under SEC Rule 102(e) under which he was suspended from appearing or practicing before the SEC as an accountant for a period of at least five years. See Chris Choi, Exchange Act Release No. 72494 (June 27, 2014),

(185.) Jill E. Fisch, Newman Reins in Criminal Prosecution of Remote Tippees for Insider Trading, CLS BLUE SKY BLOG (January 28, 2015), remote-tippees-for-insider-trading.

(186.) Bateman Eicher, Hill Richards, Inc. v. Berner, 472 U.S. 299, 313 (1985) (emphasizing that "insiders and broker-dealers who selectively disclose material non-public information commit a potentially broader range of violations than do tippees who trade on the basis of that information"); see also id. at 313 n.23 (observing that its view on the relative culpability of tippers and tippees "is reinforced" by Congress's recent enactment of ITSA, "which imposes civil penalties on nontrading tippers out of the belief that, '[a]bsent the tipper's misconduct, the tippee's trading would not occur' and that a tipper is therefore 'most directly culpable in a violation,'" citing H.R. REP. NO. 98-355, at 9 (1983)).

(187.) Cf. United States v. Werner, 160 F.2d 438, 441 (2d Cir. 1947) (observing that "[t]he receivers of stolen goods almost never 'know' that they have been stolen, in the sense that they could testify to it in a court room" and emphasizing that thieves rarely "admit their theft to the receivers [because] that would much impair their bargaining power").

(188.) See SEC v. Musella, 578 F. Supp. 425, 442 (S.D.N.Y. 1984) (observing that the tippee "could only regard [tipper] as a trafficker in stolen goods"); In the Matters of Inv'rs Mgmt. Co., 44 S.E.C. 633, *11 n.2 (Comm'r Smith, concurring) (equating tippees to those who "knowingly receive stolen goods"); see also Federal Sentencing Guidelines [section] 2B1.1 (introductory comment grouping together "basic forms of property offenses: theft, embezzlement, fraud, forgery, counterfeiting ... insider trading, transactions in stolen goods, and simple property damage or destruction") (emphasis added). Professor Richard Epstein has likewise emphasized that under a theory of unjust enrichment, "any party who is in possession of stolen information that he knows is not his" is under a constructive trust to preserve the asset value for its rightful owner. See Richard A. Epstein, Returning to Common-Law Principles of Insider Trading After United States v. Newman, 125 YALE L.J. 1482, 1506 (2016).

(189.) Although the defendant in Salman likens gratuitous tipping to the fiduciary misconduct at issue in Skilling v. United States, 561 U.S. 358 (2010) and McDonnell v. United States, 136 S. Ct. 2355 (2016), and invokes the principle of lenity, those decisions are inapposite. Skilling and McDonnell involved prosecutions under 18 U.S.C. [section] 1346, the federal statute that criminalizes "honest services fraud," a concept that implicates "the due process concerns underlying the vagueness doctrine," when applied to fiduciary misconduct that does not involve the "seriously culpable conduct" at issue in bribery or kickback cases. Skilling, 561 U.S. at 408, 411. Tippees like the defendant in Salman are not being punished for securities fraud simply because of their involvement in, or their enrichment from, fiduciary misconduct. On the contrary, they are being punished for their knowing or reckless participation in a deception of the source of the misappropriated information, in connection with securities transactions that "'undermines the integrity of, and investor confidence in, securities markets,'" United States v. O'Hagan, 521 U.S. 642, 658 (1997). And the Court in O'Hagan left no doubt that willful trading on the basis of misappropriated information constitutes a crime under Section 10(b) and Rule 10b-5, as well as a property-based crime under 18 U.S.C. [section] 1341, the federal mail fraud statute. See O'Hagan, 521 U.S. at 677-78 (observing that its rulings on the securities fraud issues require its reversal of the Eighth Circuit's judgment "on the mail fraud counts as well").

(190.) O'Hagan, 521 U.S. 642, 652 (1997).

(191.) See James J. Park, Rule 10b-5 and the Rise of the Unjust Enrichment Principle, 60 DUKE L.J. 345, 409 (2010) (contending that "the Supreme Court's decision in O'Hagan suggests a doctrinal foundation that can be modified so that a workable Rule 10b-5 unjust enrichment principle can continue to develop").

(192.) See Andrew S. Gold, The New Concept of Loyalty in Corporate Law, 43 U.C. DAVIS L. REV. 457, 464 (2009) ("The past few years have witnessed a sea change in the Delaware courts' understanding of the fiduciary duty of loyalty.").

(193.) See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006) (quoting The Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006)).

(194.) 15 U.S.C. [section] 78p(b) (2011).

(195.) STOCK EXCHANGE PRACTICE, REPORT OF COMMITTEE ON BANKING AND CURRENCY, S. REP. NO. 73-1455, 73d Cong., 2d Sess., at 55 (1934).

(196.) Chiarella v. United States, 445 U.S. 222, 233 (1980).

(197.) Letter from Justice Lewis F. Powell, Jr., to Chief Jusitce Warren E. Burger 1 (Feb. 4, 1980) (quoted in Adam C. Pritchard, Justice Lewis F. Powell, Jr., and the Counterrevolution in the Federal Securities Laws, 52 DUKE L.J. 841, 934 n.568 (2003)).

(198.) Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376, 98 Stat. 1264 (1984) (codified as amended in scattered sections of 15 U.S.C. [section] 78).

(199.) Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 100-704, 102 Stat. 4677 (1988) (codified as amended in scattered sections of 15 U.S.C. [section] 78).

(200.) Stop Trading on Congressional Knowledge Act, Pub. L. No. 112-105, 126 Stat. 291 (2012).

(201.) Cf. United States v. Little Lake Misere Land Co., 412 U.S. 580, 593 (1973) (observing that "the inevitable incompleteness presented by all legislation means that interstitial federal lawmaking is a basic responsibility of the federal courts").

(202.) See Jill E. Fisch, Federal Securities Fraud Litigation as a Lawmaking Partnership, 93 WASH. U.L. REV. 453, 476 (2015) (depicting "the development of the legal prohibition on insider trading" as "[p]erhaps the most compelling example of [a] lawmaking partnership").

(203.) See infra note 264 and accompanying text (quoting STOCK Act).

(204.) HOUSE COMMITTEE ON ENERGY AND COMMERCE, H.R. REP. NO. 98-355, at 1 (1983).

(205.) See id. at 13 n.20 (identifying civil and criminal actions brought against corporate "outsiders" pursuant to the misappropriation theory).

(206.) Id. at 14.

(207.) Id. at 15.

(208.) Id.

(209.) H.R. REP. NO. 98-355, at 1.

(210.) Id. at 2.

(211.) Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376, 98 Stat. 1264, (1984) [section] 3 (codified as amended in scattered sections of 15 U.S.C. [section] 78).

(212.) Id. at [section] 2.

(213.) 15 U.S.C. [section] 78u-1 (2012).

(214.) H.R. REP. NO. 98-355, at 4 (observing that since its creation, "the Commission has appropriately used the antifraud provisions to remedy unlawful trading and tipping by persons in a variety of positions of trust and confidence who have illegally acquired or illegally used material non-public information"). The Committee also expressly noted the "broad antifraud remedy under section 14(e)" as well as the SEC's adoption of Rule 14e-3. Id.

(215.) See, e.g., Laventhall v. Gen. Dynamics, 704 F.2d 407, 410-11 (8th Cir. 1983) (observing that the purchase of options "does not represent contribution of capital to the corporation").

(216.) Id.; see also O'Connor & Assocs. v. Dean Witter Reynolds, Inc., 529 F. Supp. 1179, 1184-85 (S.D.N.Y. 1981) (stating that an option-holder "is owed no special duty by the officers and directors of the corporation because, quite simply, the corporation is not run for his benefit").

(217.) See 15 U.S.C. [section] 78t(d) (2011) ("Wherever communicating, or purchasing or selling a security while in possession of, material nonpublic information would violate, or result in liability to any purchaser or seller of the security under any provisions of this chapter, or any rule or regulation thereunder, such conduct in connection with a purchase or sale of a put, call, straddle, option, [or] privilege ... with respect to such security ... shall also violate and result in comparable liability to any purchaser or seller of that security under such provision, rule, or regulation.").

(218.) See LANGEVOORT, supra note 172, [section] 3-11 (observing that Section 20(d) demonstrates that while ITSA's drafters "were prepared in some respects to ratify the prevailing tests for insider trading liability, they believed that, as a policy matter, the Court's rule can result in too narrow a prohibition").

(219.) The defendant-attorney in O'Hagan, for example, reaped the lion's share of his four million dollars in profits through options trading based on the material nonpublic information he had misappropriated from his law firm and its client. United States v. O'Hagan, 521 U.S. 642, 648 (1997). The Court affirmed his conviction for violating Section 10(b) and Rule 10b-5, without once referencing the express statutory prohibition in Section 20(d). Id. at 666.

(220.) H.R. REP. NO. 98-355, at 32 (reprinting letter from SEC Chairman John S. R. Shad to the Honorable Timothy E. Wirth, Chairman, Subcommittee on Telecommunications, Consumer Protection and Finance, House Committee on Energy and Commerce).

(221.) Id. at 13 (citing testimony by Arnold S. Jacobs).

(222.) Id.

(223.) Id.

(224.) See CONG. REC. S8912-8913 (June 29, 1984) (remarks of Senator Alfonse D'Amato).

(225.) Id.

(226.) See Donald C. Langevoort, The Insider Trading Sanctions Act of 1984 and Its Effect on Existing Law, 37 VAND. L. REV. 1273, 1277-78 (1984) (discussing ITSA's legislative process).

(227.) H.R. REP. NO. 98-355, at 15 (specifying that the SEC's report should include: "(1) the number of insider trading cases brought, settled, and tried; (2) the propositions for which counsel cites Dirks in representation of clients accused of insider trading; and (3) a summary and analysis of lower court decisions citing and interpreting Dirks").


(229.) See id., at B-2 to B-3.

(230.) Bateman Eichler v. Berner, 472 U.S. 299 (1985); see supra text accompanying notes 89-94 (discussing Bateman Eicher).

(231.) See SEC REPORT reprinted in LANGEVOORT, supra note 228, at App. B-3.

(232.) Bateman Eicher, 472 U.S. at 319 n.21 (quoting Dirks v. SEC, 463 U.S. 646, 663-64 (1983)).

(233.) See SEC Report reprinted in LANGEVOORT, supra note 228, at App. B-1.

(234.) Id.

(235.) H.R. REP. NO. 100-910, at 8 (1988); see also id. at 7-8 (emphasizing that "the small investor will be--and has been--reluctant to invest in the market if he feels it is rigged against him").

(236.) Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 100-704, [section]2(1), 102 Stat. 4677 (1988).

(237.) Id. at [section] 2(2).

(238.) Steve Thel, Statutory Findings and Insider Trading Regulation, 50 VAND. L. REV. 1091, 1095 (1997). However, as Professor Thel observes, the O'Hagan Court did not have to rule on the effect of ITSFEA's findings "because it decided the case before it in the way the findings dictated." Id. at 1116; see United States v. O'Hagan, 521 U.S. 642, 666 n.11(1997) (observing that because it "upheld the misappropriation theory on the basis of [section] 10(b) itself [it] need not address ITSFEA's relevance"); id. at 677 n.22 (observing that because it upheld "Rule 14e-3(a) on the basis of [section] 14(e) itself [it] need not address ITSFEA's relevance").

(239.) Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 100-704, [section] 4, 102 Stat. 4677 (1988). In 2002, these maximum criminal penalties were again increased with the enactment of the Sarbanes-Oxley Act, Pub. L. No. 107-204, [section] 1106, 116 Stat. 745 (2002), and Section 32(a) of the Exchange Act, 15 U.S.C. [section] 78ff(a), currently provides for fines of not more than $5 million and/or imprisonment of not more than 20 years.

(240.) See H.R. REP. NO. 100-910 at 18 (explaining the necessity of "a technical amendment to ITSA to reflect more accurately its original intent").

(241.) Exchange Act [section] 21A(b)(1), 15 U.S.C. [section] 78u-1(b)(1) (2012).

(242.) Exchange Act [section] 15(g), 15 U.S.C. [section] 78o(g) (2012); Investment Advisers Act [section] 204A, 15 U.S.C. [section] 80b-4a (2012).

(243.) Insider Trading and Securities Fraud Enforcement Act, [section] 3(a)(2).

(244.) Exchange Act [section] 20A(a), 15 U.S.C. [section] 78t-1(a) (2012).

(245.) Exchange Act [section] 20A(c), 15 U.S.C. [section] 78t-1(c) (2012).

(246.) H.R. REP. NO. 100-910 at 26.

(247.) Moss v. Morgan Stanley Inc., 719 F.2d 5 (2d Cir. 1983).

(248.) Id. at 9 n.6.

(249.) Id. at 13 (quoting Moss v. Morgan Stanley Inc., 553 F. Supp. 1347, 1353 (S.D.N.Y. 1983)).

(250.) See LANGEVOORT, supra note 172, [section] 9.7; see also infra text accompanying notes at 386-404 (discussing Chief Justice Burger's dissent in Chiarella and proposing a unified and expanded theory of insider trading that is premised on "fraud on contemporaneous traders").

(251.) See Thomas W. Joo, Legislation and Legitimation: Congress and Insider Trading in the 1980s, 82 IND. L.J. 575, 576 (2007) (discussing a Congress that was "preoccupied with insider trading").

(252.) H.R. REP. NO. 100-910 at 11 (1988).

(253.) Id.

(254.) See supra text accompanying notes 151-54 (discussing the grant of certiorari in Carpenter v. United States, 484 U.S. 19 (1987)).

(255.) S. 1380, 100th Cong. (1987). The bill was introduced by Senators Donald Riegle and Alfonse D'Amato based on recommendations by a committee of securities-law practitioners headed by Harvey Pitt, who many years later became Chair of the SEC. Harvey L. Pitt & Karen L. Shapiro, Securities Regulation by Enforcement: A Look at the Next Decade, 7 YALE J. REG. 149, 227-28 n.332 (1990).

(256.) S. 1380, 100th Cong. ("Reconciliation Draft," dated November 19, 1987), reprinted in Symposium: Defining Insider Trading, 39 ALA. L. REV. 531 app. at 554 (1988). The statutory definition of "wrongful" extended to information that "'has been obtained by, or its use would constitute, directly or indirectly, (A) theft, bribery, misrepresentation, espionage (through electronic or other means) or (B) conversion, misappropriation, a breach of any fiduciary duty, any personal or other relationship of trust and confidence, or any contractual or employment relationship.'" Id.

(257.) Carpenter v. United States, 484 U.S. 19, 24 (1987) (stating that "[t]he Court is evenly divided with respect to the convictions under the securities laws and for that reason affirms the judgment below on those counts").

(258.) Pitt & Shapiro, supra note 255, at 236 (observing that "when there was no longer any compelling fear that the courts would require such legislation, the Proscriptions Act faded from public attention, and Congress turned to other legislative proposals more directly supportive of the Commission's program").

(259.) STOCK Act, Pub. L. No. 112-105 [section][section] 4(a), 9(b), 126 Stat. 291 (2012) (affirming that members of Congress and congressional employees, as well as all officers and employees in the executive and judicial branches of the federal government, "are not exempt from the insider trading prohibitions arising under the securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder"); id. at [section][section] 4(b), 9(b) (codified at 15 U.S.C. [section][section] 78u-1(g)(1) and (h)(1) (2012)).

(260.) Robert Pear, Insider Trading Ban for Lawmakers Clears Congress, N.Y. TIMES (Mar. 22, 2012),

(261.) See Congress: Trading Stock on Inside Information, 60 MINUTES (June 11, 2012), (stating in the episode summary: "[f]or now, the practice is perfectly legal, but some say it's time for the law to change").

(262.) See Insider Trading and Cong. Accountability: Hearing Before the S. Comm. on Homeland Sec. & Gov't Affairs, 112th Cong. (2011) [hereinafter Senate STOCK Act Hearings]; The Stop Trading on Cong. Knowledge Act: Hearing on H.R. 1148 Before the H. Comm. on Fin. Servs., 112th Cong. (2011) [hereinafter House STOCK Act Hearings].

(263.) See S. REP. NO. 112-244, S. 2038 114th Cong. (2012), at 5 (stating that "the Committee agrees with Professor Langevoort's explanation of clarifying that the insider trading provisions apply to Members of Congress").

(264.) 15 U.S.C. [section][section] 78u-1(g)(1) and (h)(1) (2012). Section 21A(g) further specifies that members of Congress and congressional employees owe that duty to Congress itself. 15 U.S.C.[section] 78u-1(g)(1).

(265.) See Fisch, supra note 202, at 480.

(266.) See Donna M. Nagy, Insider Trading, Congressional Officials, and Duties of Entrustment, 91 B.U. L. REV. 1105, 1130-37 (2011) (critiquing prior versions of the STOCK Act).

(267.) S. REP. NO. 112-244, at 9 (2011-2012).

(268.) See House STOCK Act Hearings, supra note 262, at 97 (prepared statement of Professor Donna Nagy highlighting the proposed Insider Trading Proscription Act of 1987 and emphasizing that "much could be gained from dusting off that proposal and reconsidering it in light of the insider trading jurisprudence that has developed over the last 25 years"); Senate STOCK Act Hearings, supra note 262, at 65.

(269.) House STOCK Act Hearings, supra note 262, at 25 (testimony of SEC Director of Enforcement Robert Khuzami) (expressing concern about "the dangers that would flow from a general statutory prohibition that attempted to cover the entire field of insider trading").

(270.) Senate STOCK Act Hearings, supra note 262, at 15 (testimony of Professor John C. Coffee, Jr. expressing concern about "conflicts in the circuits" because "legislation with new terms" will prompt federal courts to "spend 10 to 15 years resolving what those new terms mean"); see also id. ("[I]f you try to adopt comprehensive legislation, I am afraid that every special interest group in the United States will want a safe harbor for what they do, and you will find that the statute will go from short to page after page of proposed safe harbors.").

(271.) See supra note 189 (differentiating the misappropriation theory endorsed in O'Hagan from the due process concerns that prompted the holding in Skilling).

(272.) Since the decision in Newman, several members of Congress have introduced bills that would define the offense of insider trading and eliminate entirely the personal benefit requirement in tipper-tippee cases. See, e.g., The Stop Illegal Insider Act, S. 702, 114th Cong. (2015), -congress/senate-bill/702/text (introduced by Senators Jack Reed (D-RI) and Robert Menendez (D-NJ)); The Ban Insider Trading Act of 2015, H.R. 1173, 114th Cong. (2015) (introduced by Rep. Steven Lynch (D-MA),; H.R. 1625, The Insider Trading Prohibition Act (2015) (introduced by Reps. Jim Himes (D-CT), Steve Womack (R-AR) and Emanuel Cleaver (D-MO)),

(273.) See supra note 268 and accompanying text (quoting STOCK Act testimony); see also Henning, supra note 54, at 773-76 (pointing out the benefits of an insider trading prohibition that would turn on the possession of material nonpublic information, akin to the abstain or disclose approach in Rule 14e-3); Jill E. Fisch, Start Making Sense: An Analysis and Proposal for Insider Trading Regulation, 26 GA. L. REV. 179, 236, 239 (1991) (suggesting that "regulation of insider trading would be improved by reclassifying such trading as a regulatory violation rather than a crime" and proposing a statute that focuses on insiders "who are in a position to control corporate disclosure"); Donald C. Langevoort, Rereading Cady, Roberts: The Ideology and Practice of Insider Trading, 99 COLUM. L. REV. 1319, 1339, 1338-39 (1991) (proposing statutory language "that eliminates the intellectual awkwardness of the prevailing fiduciary basis for the duty to disclose to marketplace traders, the Dirks 'personal benefit' test ... and the cramped nature of the misappropriation theory").

(274.) 17 C.F.R. [section] 243.100 (2011).

(275.) See Robert B. Thompson & Ronald King, Credibility and Information in Securities Markets after Regulation FD, 79 WASH. U. L. Q. 615, 634 (2001) (concluding that "the effect of Regulation FD is to redraw the line regarding what transfers of information are permissible").

(276.) See Jill E. Fisch & Hillary A. Sale, The Securities Analyst As Agent: Rethinking the Regulation of Analysts, 88 IOWA L. REV. 1035, 1061 (2003) (observing that "the Supreme Court's decisions in Chiarella and Dirks created a privileged status for analysts with respect to insider trading regulation").

(277.) See Selective Disclosure and Insider Trading, Release Nos. 33-7881, 34-43154, [2000 Transfer Binder] FED. SEC. L. REP. (CCH) [paragraph] 86,319, at 83,692, 83,677 (Aug. 15, 2000) [hereinafter Regulation FD Adopting Release]; see also Fisch & Sale, supra note 276, at 1062 (observing that the problem of selective disclosure "took on increased urgency as market volatility increased in the late 1990s" and as evidence mounted that "a substantial number of issuers apparently made selective disclosure a regular practice").

(278.) Regulation FD Adopting Release, supra note 277, at 83,677.

(279.) Id.

(280.) Id. (quoting United States v. O'Hagan, 521 U.S. 642, 658 (1997) (citing Victor Brudney, Insiders, Outsiders and Informational Advantages under the Federal Securities Laws, 93 HARV. L. REV. 322, 360 (1979)).

(281.) See Donna M. Nagy & Richard W. Painter, Selective Disclosure by Federal Officials and the Case for an FGD (Fairer Government Disclosure) Regime, 2012 WIS. L. REV. 1285, 1341-43 (discussing the securities industry's reaction to the SEC settlement in Phillip J. Stevens, Litigation Release No. 12,813, 48 S.E.C. Docket 739, 739 (Mar. 19, 1991)). The SEC claimed that selective disclosure to a securities analyst satisfied the Dirks test because the CEO's motivation in making the disclosure was "'to protect and enhance his reputation.'" Id. at 1342 (quoting Phillip J. Stevens, Litigation Release, No. 12,813, 48 S.E.C. Docket 739, 739 (Mar. 19, 1991)). The SEC's position was never tested in court and the settlement sparked an outcry from securities law scholars and practitioners. The SEC thereafter opted against initiating subsequent Rule 10b-5 litigation to get at the problem of selective disclosure. Id. at 1343.

(282.) See Nagy & Painter, supra note 281, at 1292; Stephen J. Choi, A Framework for the Regulation of Securities Market Intermediaries, 1 BERKELEY BUS. L.J. 45, 57 (2004) (contending that the Court in Dirks "was particularly concerned with giving corporate officers the ability to pass inside information freely to analysts").

(283.) See Donald C. Langevoort, Investment Analysts and the Law of Insider Trading, 76 VA. L. REV. 1023, 1024 (1990) (observing that selective disclosures to analysts served a variety of corporate ends, "such as to enhance the company's standing with the investor community or to strengthen pre-existing lines of communication").

(284.) 15 U.S.C. [section] 78m(a) (2010). In addition to issuers with a class of securities registered under Exchange Act Section 12, Regulation FD applies to issuers required to file reports under Exchange Act Section 15(d) and to closed-end investment companies, but it does not apply to any other investment companies or any foreign government or foreign private issuer. 17 C.F.R. [section] 243.101(b) (2016).

(285.) 17 C.F.R. [section] 243.101(c), (f).

(286.) Regulation FD Adopting Release, supra note 277, at 83,681 (quoting FD Rule 100(b)(1)).

(287.) 17 C.F.R. [section] 243.100(b)(2)(i).

(288.) Id. at [section] 243.100(b)(2)(ii).

(289.) Id. at [section] 243.101(c).

(290.) See Regulation FD Adopting Release, supra note 277, at 83,681 (stating that "Regulation FD ... establishes a clear rule prohibiting unfair selective disclosure").

(291.) 17 C.F.R. [section] 243.101(a). An "intentional" disclosure occurs when "the person making the disclosure either knows, or is reckless in not knowing, that the information he or she is communicating is both material and nonpublic." Id.

(292.) Id. at [section] 243.101(d). "Promptly means as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day's trading on the New York Stock Exchange) after a senior official of the issuer ... learns that there has been a non-intentional disclosure by the issuer or person acting on behalf of the issuer of information that the senior official knows, or is reckless in not knowing, is both material and nonpublic." Id.

(293.) Thompson & King, supra note 275, at 615.

(294.) See 17 C.F.R. [section] 243.102 (stating that "[n]o failure to make a public disclosure required solely by [section] 243.100 shall be deemed to be a violation of Rule 10b-5 under the Securities Exchange Act").

(295.) See Regulation FD Adopting Release, supra note 277, at 83,691. As Professor John Coffee points out, the "willful" violation of an SEC rule is a criminal offense under both the Exchange Act and the Securities Act. Thus, a corporate executive who willfully violates Regulation FD by engaging in warehousing in advance of a merger announcement "is seemingly subject to criminal prosecution." John C. Coffee, Jr., Introduction: Mapping the Future of Insider Trading Law: Of Boundaries, Gaps, and Strategies, 2013 COLUM. BUS. L. REV. 281, 311 (2013).

(296.) See Richard W. Walker, Director of Enforcement, Sec. Exch. Comm'n, Speech before the Compliance & Legal Division of the Securities Industry Association: Regulation FD--An Enforcement Perspective (Nov. 1, 2000) (transcript available at (advising that while it would not be a common occurrence for the SEC to charge an analyst, "comments by an analyst to an issuer along the lines of 'you can tell me, the SEC will never find out'.... [would] raise red flags and convey an intention by the analyst to induce the issuer's violation of FD").

(297.) Regulation FD Adopting Release, supra note 277, at 83,684.

(298.) Id.

(299.) Thompson & King, supra note 275, at 635.

(300.) See supra text accompanying notes 60-63. In view of Newman's ruling that the tippers did not breach a duty of trust and confidence owed to their employers, the Dell insider would have been a "'person acting on behalf of an issuer'" because he was a person who "regularly communicate[d] with securities industry professionals," even if he was not an "investor relations officer." 17 C.F.R. [section] 243.101 (2016).

(301.) See Jill E. Fisch, Regulation FD: An Alternative Approach to Addressing Information Asymmetry, in RESEARCH HANDBOOK ON INSIDER TRADING 129 (Stephen M. Bainbridge ed. 2013) (observing that issuers "have taken seriously the applicable regulatory restrictions in engaging in private communications with investors and analysts and have structured compliance and education systems to reduce both intentional and unintentional selective disclosures").

(302.) See supra text accompanying notes 64-65. Depending on the scope of his duties and the regularity of his contacts with securities industry professionals or holders of the company's securities, the NVIDIA insider may have been a "person acting on behalf of an issuer" under Regulation FD, Rule 101(c).

(303.) See supra note 84 and accompanying text (quoting Dirks).

(304.) See supra text accompanying notes 32-33 (discussing amicus brief filed in the Second Circuit by Professors Bainbridge, Henderson and Macey); see also Epstein, supra note 188, at 1485 (contending that "Regulation FD places an unfortunate straightjacket on how various firms do business with analysts of their stock" and arguing that firms "should be allowed to authorize their employees to make selective disclosures of inside information so long as [their] officers and directors have concluded in good faith that the release of that information will increase overall firm value"); Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. CORP. L. 1, 51 (2002) (contending that "Regulation FD can be seen as part of a misguided SEC strategy of insider trading regulation that has hobbled markets' ability to scrutinize corporate misconduct" and concluding that "forcing sharing of information necessarily weakens incentives to gather and create the information").

(305.) Dirks v. SEC, 463 U.S. 646, 658 (1983). In addition to the SEC's growing concern about the unfair use of selectively disclosed information by analysts and their client, see supra notes 278-80 and accompanying text, technological changes also prompted the SEC to reassess the value of encouraging private conversations between insiders and analysts. See Michael D. Guttentag, Selective Disclosure and Insider Trading: Tipper Wrongdoing in the 21st Century, 69 FLA. L. REV. (forthcoming 2016) (SSRN draft at 12), abstract_id=2830735 (quoting Dirks, 463 U.S. at 659) (pointing out that Dirks's favorable view toward selective disclosure in 1983 was in part a function of the then-nature of "'this type of information, and indeed of markets themselves, [whereby] such information [could not] be made simultaneously available to all of the corporation's stockholders or the public generally'").

(306.) See Pritchard, supra note 34, at 861 ("Powell wanted to leave space for securities professionals to uncover nonpublic information, even if it came from corporate insiders.").

(307.) See Donald C. Langevoort, Newman and Selective Disclosure, CLS BLUE SKY BLOG (Jan. 28, 2015), (expressing concern that Newman "read[s] almost as a roadmap for selective disclosure"). The panel in Newman drew attention to other investor relations officials at Dell and NVIDIA who "routinely 'leaked' earnings data in advance of quarterly earnings." United States v. Newman, 773 F.3d 438, 455 (2d Cir. 2014). In the one specific example provided, Dell's Head of Investor Relations selectively disclosed nonpublic earnings-related information to "establish relationships with financial firms who might be in a position to buy Dell's stock." Id. The fact that other Dell and NVIDIA officials may have caused their companies to violate Regulation FD should have heightened the court's scrutiny of the tips provided by the defendants' original tippers. Newman's view that other instances of selective disclosure at Dell and NVIDIA somehow mitigate that conduct is troubling, to say the least. Cf. Langevoort, supra (observing that Newman "takes as exculpatory how willing senior types at Dell and NVIDIA were to leak earnings information" and noting that the court failed to mention "that (if the information was material) that conduct was a gross violation of Regulation FD").

(308.) Dirks v. SEC, 463 U.S. 646, 662 (1983).

(309.) Regulation FD Adopting Release, supra note 277, at 83,684.

(310.) Newman, 773 F.3d at 451-52.

(311.) See supra text accompanying note 176 (quoting SEC v. Maio, 51 F.3d 623, 632 (1995)).

(312.) Newman, 773 F.3d at 452 (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)).

(313.) See infra notes 375-79 and accompanying text (discussing Regulation FD's relevance to a tippee's awareness of an insider-tipper' s lack of good faith). The question of which policy preferences--the SEC's or the Dirks majority's--should be accorded greater weight in deciding the legality of gratuitous tipping also implicates core principles of administrative law from decisions including Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). See Whitman v. United States, 135 S. Ct. 352 (2014) (statement by Scalia & Thomas, JJ) (agreeing with the Court's denial of certiorari, but suggesting that Chevron does not obligate courts to defer "to an executive agency's interpretation of a law that contemplates both criminal and administrative enforcement"). Because it is beyond the scope of this (already lengthy) Article, analysis of Chevron deference issues will be left for another day.

(314.) United States v. Whitman, 904 F. Supp. 2d 363 (S.D.N.Y. 2012).

(315.) Id. at 370. Some securities law scholars have advocated for a role for state law that would entail much more than simply guidance. See Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 WASH. & LEE L. REV. 1189, 1193 (1995) (arguing that such incorporation "would advance the federalism policies of the federal securities laws, without frustrating any of the other policies thereof").

(316.) In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006).

(317.) Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006).

(318.) United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014).

(319.) Dirks v. SEC, 463 U.S. 646, 660 (1983).

(320.) Cf. Pritchard, supra note 197, at 942 (recognizing that under Dirks, "the federal common law of insider trading was brought into line with the traditional distinction in state corporate law between breaches of care and loyalty").

(321.) DEL. CODE ANN. tit. 8, [section] 102(b)(7) (2015).

(322.) DEL. CODE ANN. tit. 8, [section] 145 (2011).

(323.) In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 36-46 (Del. 2006).

(324.) Id. at 64.

(325.) Id. at 66.

(326.) Id.

(327.) Id.

(328.) Disney, 906 A.2d at 67.

(329.) Id. at 65.

(330.) Gold, supra note 192, at 469.

(331.) Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006).

(332.) Id. at 369 (quoting In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006)).

(333.) Id. at 369 ("[A] failure to act in good faith is not conduct that results, ipso facto, in the direct imposition of fiduciary liability.").

(334.) Id. at 370.

(335.) Id. (quoting Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del .Ch. 2003)).

(336.) See Gold, supra note 192, at 471. But see Leo E. Strine, Jr. et al., Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law, 98 GEO. L.J. 629, 695 (2010) (viewing Stone's principal contribution as one of "doctrinal clarity" that prompts courts to inquire into good faith as "an instrumental way of determining whether an act of disloyalty was committed").

(337.) Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003).

(338.) Id.

(339.) See Desimone v. Barrows, 924 A.2d 908, 934-35 (Del. Ch. 2007) (observing that "Stone clarified one of the most difficult questions in corporate law--when directors with no motivation to injure the firm can be held responsible if the corporation incurs serious harm as a result of its failure to obey the law" and emphasizing that a "knowing use of illegal means to pursue profit for the corporation is director misconduct"). For an argument that a fiduciary's intentional violation of positive law should be treated separately from the duty of loyalty, see Stephen M. Bainbridge et al., The Convergence of Good Faith and Oversight, 55 UCLA L. REV. 559, 590-94 (2008).

(340.) United States v. Whitman, 904 F. Supp. 2d 363, 370 (S.D.N.Y. 2012).

(341.) See SEC v. Obus, 693 F.3d 276, 287 (2d Cir. 2012) (hypothesizing careless cellphone user and eavesdropping passenger).

(342.) Dirks v. SEC, 463 U.S. 646, 662 (1983).

(343.) See id. Cf. RESTATEMENT (THIRD) OF AGENCY [section] 8.01 cmt. c (Am. Law. Inst. 2006) ("[A]n agent may reveal to law-enforcement authorities that the principal is committing or is about to commit a crime.").

(344.) In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006).

(345.) United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014) (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)).

(346.) Although Professor Epstein disagrees with Newman's reasoning on the issue of tipper personal benefits, he supports the decision's outcome in view of the court's conclusion that "there was no evidence in the record to establish that the defendants knew they were trading on unauthorized information released in violation of the fiduciary duties of insiders." Epstein, supra note 188, at 1482. However, under common law principles, the defendants' awareness of Regulation FD would seemingly warrant the imposition of a constructive trust on the profits generated from the use of Dell and NVIDIA's confidential information: the hedge fund managers could not have reasonably believed that officers and directors of those companies had authorized their employees to repeatedly and selectively disclose unreleased earnings and other market-sensitive information to securities analysts.

(347.) Id.

(348.) United States v. Salman, 792 F.3d 1087, 1092 (9th Cir. 2015) (quoting Dirks v. SEC, 463 U.S. 646, 664 (1983)).

(349.) Dirks, 463 U.S. at 664.

(350.) Id. at 659.

(351.) Id. at 660.

(352.) See Pritchard, supra note 34, at 862 n.25 (quoting handwritten notes of Justice Lewis F. Powell, Jr.).

(353.) See id. at 863.

(354.) See id. (quoting Justice Lewis F. Powell, Jr. Memorandum for Conference, Dirks v. SEC).

(355.) There was never a dispute in Salman as to whether the two brothers had a "meaningfully close personal relationship." Thus, that part of the Newman holding is not, at least theoretically, presented to the Court for review. See Brief for Petitioner, supra note 134 (quoting question presented in Salman's petition for certiorari). A short opinion by the Court simply affirming the Ninth Circuit, therefore, would not necessarily undercut the "meaningful relationship" part of Newman's heightened standard. Although the "tangible benefit" part of Newman's holding has proven to be the more difficult hurdle for the government to scale, the "meaningfully close personal relationship" prong has presented some difficulty as well. See In the Matter of Joseph C. Ruggieri, Admin. Proceedings Ruling Release No. 3-16178 (Sept. 14, 2015), (applying Newman and concluding that while the tipper was "friends" with the tippee, "the evidence fails to establish that Bolan and Ruggieri's 'friendship' was meaningful, close, or personal").

(356.) See, e.g., Dirks v. SEC, 463 U.S. 646, 654-56, 659-660, 662, 664-67 (1983).

(357.) Id. at 659, 662, 666 n.27.

(358.) See Bainbridge, supra note 315, at 1200 (concluding that Dirks should be read as imposing a "duty to refrain from self-dealing in nonpublic information"); id. at 1201 ("[A] duty to disclose before trading arises only if trading would violate a duty to refrain from self-dealing in confidential information owed by the trader to the owner of that information."); see also Pritchard, supra note 34, at 874 ("Giving away corporate information to strangers might make you feel like a big shot, but the standard is self-dealing: the gift needs to be an indirect personal benefit, which suggests a close relationship, not a casual one.").

(359.) United States v. O'Hagan, 521 U.S. 642, 643, 652 (1997).

(360.) Cf. James J. Park, Rule 10b-5 and the Rise of the Unjust Enrichment Principle, 60 DUKE L.J. 345, 409 (2010) ("[T]he Supreme Court's decision in O'Hagan suggests a doctrinal foundation that can be modified so that a workable Rule 10b-5 unjust enrichment principle can continue to develop.").

(361.) Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006).

(362.) Cox, supra note 38.

(363.) See id. (contending that this modern day Revere would have breached "his state law fiduciary relationship" and that his corporate employer "would be able to hold him financially accountable under orthodox agency principles").

(364.) In his critique of the Newman opinion, Professor Prichard contends that for a gift of information to constitute illegal tipping, "the gift needs to be exploitation, not waste (the corporate law term for a hypothetical gift to a stranger)." Pritchard, supra note 34, at 874. But if the Court in Salman were to make it explicit that breaches of the duty of loyalty in connection with securities trading create a disclosure obligation for purposes of Rule 10b-5, then the employee's tips to strangers would violate Rule 10b-5. Cf. In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 (Del. Ch. 2005), aff'd, 906 A.2d 27, 75 (Del. 2006) ("The Delaware Supreme Court has implicitly held that committing waste is an act of bad faith.").

(365.) See supra note 145 and accompanying text (quoting O'Hagan).

(366.) Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003).

(367.) Dirks v. SEC, 463 U.S. 646, 668 (1983) (Blackmun, J., dissenting).

(368.) Id. at 670; see Pritchard, supra note 34, at 865 (contending that it was Justice O'Connor who convinced Justice Powell to incorporate the requirement of a tipper's personal benefit, which alleviated the need for a "'tippee to 'predict' what is going on in the mind of his tipper'").

(369.) 17 C.F.R. [section] 243.100(b)(1)(iv) (2011).

(370.) Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006) (quoting In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 76 (Del. 2006)).

(371.) United States v. O'Hagan, 521 U.S. 642, 655 (1997).

(372.) Moreover, even if some supervising officials at a publicly traded company were to condone selective disclosures notwithstanding the firm's compliance policies and the firm's regulatory obligations under Regulation FD, the firm itself is still deserving of a loyalty obligation from its agent--and to foreclose a finding of deception, full disclosure would have to be made to the firm. See Guttentag, supra note 305, at 49 (concluding that even if an insider's tips do not deceive an immediate principal who may have sanctioned selective disclosures, such tips would deceive "the firm which has adopted a policy prohibiting such behavior").

(373.) If the Salman Court were to reformulate the test for joint tipper-tippee liability to focus explicitly on a tipper's deceptive breach of the duty of loyalty, then the SEC would almost certainly be prompted to reconsider--and to retract--prior positions taken with respect to the effect of Regulation FD violations. Indeed, when it initially proposed Regulation FD, the SEC expressly disclaimed any intent to "treat selective disclosure as a type of fraudulent conduct or revisit the insider trading issues addressed in Dirks." See Selective Disclosure and Insider Trading, Exchange Act Release No. 34-42259 [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) [paragraph] 86,228, at 82,860 (Dec. 20, 1999). The SEC's position, however, was predicated on the view that Dirks required a personal benefit on the part of the tipper for a selective disclosure to be illegal, id., which was itself a function of a pre-Stone, pre-Disney notion that the duty of loyalty encompassed little more than an obligation to avoid self-dealing. See supra text accompanying notes 325-40.

(374.) Dirks v. SEC, 463 U.S. 646, 660 (1983).

(375.) See supra text accompanying note 58 (observing that Newman's stock trading generated more than $4 million in profits for the funds he managed and Chiasson's funds reaped profits exceeding $68 million).

(376.) Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006) (quoting In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 76 (Del. 2006)).

(377.) Dirks v. SEC, 463 U.S. 646, 664 (1983); see supra text accompanying note 188 (comparing awareness about misappropriated information to awareness about other types of stolen property).

(378.) Professor Guttentag takes this conclusion even farther and argues that, in view of Regulation FD and the internal compliance policies adopted by publicly traded firms to protect the confidentiality of market-sensitive information, courts should "create a rebuttable presumption that repeated selective access to material nonpublic information indicates that deceptive conduct is occurring." See Guttentag, supra note 305, at 32.

(379.) United States v. O'Hagan, 521 U.S. 642, 659 (1997).

(380.) See SEC v. Dorozhko, 574 F.3d 42, 51 (2d Cir. 2009). The court in Dorozhko was of the view that no breach of duty was necessary because "misrepresenting one's identity in order to gain access to information that is otherwise off limits, and then stealing that information is plainly 'deceptive.'" Id. But the court raised a question as to whether exploiting a weakness in an electronic code to gain unauthorized access would involve active deception or "mere[ly] theft." Id.; see also Noeleen Walder et al., Hackers stole secrets for up to $100 million insider-trading profit: U.S., REUTERS (Aug. 12, 2015, 5:05 AM), -cybercybersecurity-hacking-stocks-arr-idUSKCN0QG1EY20150812; Andrew N. Vollmer, Computer Hacking and Securities Fraud, 47 SEC. REG. & L. REP. 1985 (Oct. 19, 2015) (contending that the ring of traders "engaged in no deceit at all" and that the actions by the hacker-tippers "were steps away from a deception coinciding with a securities trade").

(381.) O'Hagan, 521 U.S. at 655-56.

(382.) See Nagy, Fiduciary Principles, supra note 47, at 1336 (contending that the Court in O'Hagan would have served its "policy goals far better had it not endorsed a theory predicated entirely on a fiduciary relationship between the source and the trader"); Nagy, Reframing Misappropriation, supra note 47, at 1274 (contending that O'Hagan's fraud-on-the-source version of the misappropriation theory is "under-inclusive in that it fails to prohibit a whole variety of securities transactions based on misappropriated information that, under the majority's rationale, would be as unfair to investors and as harmful to securities markets as the particular trading accomplished by O'Hagan").

(383.) O'Hagan, 521 U.S. at 655 n.6.

(384.) Id. at 661 n.9.

(385.) Chiarella v. United States, 445 U.S. 222, 240 (1980) (Burger, C.J., dissenting).

(386.) See Brief of Respondent United States at 39-43, Chiarella v. United States, 445 U.S. 222 (1979) (No. 78-1202), 1979 WL 199454.

(387.) Chiarella, 445 U.S. at 239-40 (Burger, C.J., dissenting).

(388.) Id. at 240 (quoting Page W. Keeton, Fraud--Concealment and Non-Disclosure, 15 TEX. L. REV. 1, 25-26 (1936)) (observing that "'[a]ny time information is acquired by an illegal act it would seem that there should be a duty to disclose that information.'").

(389.) Id.; see Donald C. Langevoort, Words from on High about Rule 10b-5: Chiarella's History, Central Bank's Future, 20 DEL. J. CORP. L. 865, 883-84 (1995) (favorably critiquing Chief Justice Burger's dissent in Chiarella and advocating judicial recognition of a misappropriation theory premised on the fraud that is perpetrated on other marketplace traders).

(390.) Phillips v. Homfray (1871), 6 Ch. App. 770 (Eng.) (discussed in Brief of Respondent United States, supra note 387, at 41).

(391.) Homfray, 6 Ch. App at 780; see also Mallon Oil Co. v. Bowen/Edwards Assoc., 965 P.2d 105, 112 (Colo. 1998) (recognizing an exception to the rule of nondisclosure "when the buyer acquires [information about oil and gas reserves] ... through improper means, such as trespass" (citing RESTATEMENT (SECOND) OF CONTRACTS [section] 161 illus. 11 (Am. Law Inst. 1981))).

(392.) Chiarella v. United States, 445 U.S. 222, 240-45 (1980) (Burger, C.J., dissenting). Along with the Chief Justice, Justices Brennan, Blackmun and Marshall supported the recognition of an exception to the general principle of caveat emptor. See id. 238-39 (Brennan, J., concurring in the judgment) (endorsing a broad misappropriation theory, but agreeing with the majority that misappropriation instructions had not been presented to the jury); id. at 245-46 (Blackmun, J, joined by Marshall, J., dissenting) (endorsing a more expansive parity of information approach, but observing that Chiarella's trading on misappropriated confidential information "is the most dramatic evidence that [he] was guilty of fraud").

(393.) See supra text accompanying notes 246-250 (discussing ITSFEA).

(394.) Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014).

(395.) United States v. O'Hagan, 521 U.S. 641, 658 (1997).

(396.) Id. at 656.

(397.) Chadbourne & Park LLP v Troice, 134 S. Ct. 1058, 1067 (2014) (quoting O'Hagan, 521 U.S. at 656). At issue in Troice was whether state law claims brought by the plaintiffs in state court were preempted by a provision in the Securities Litigation Uniform Standards Act, which limited the provision to cases in which plaintiffs allege a "misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." Id. at 1064 (quoting 15 U.S.C. [section] 78bb(f)(1)). The Court looked to Rule 10b-5's "in connection with" requirement to assist its task of interpreting the identical language in SLUSA. Id. at 1066.

(398.) Id. at 1069 (internal citations omitted) (emphasis added). But see id. at 1077 (Kennedy, J., dissenting) (quoting O'Hagan and questioning the view that the securities fraud at issue in O'Hagan related to an investment decision, and highlighting O'Hagan's holding that the attorney-defendant's securities transactions deceived and defrauded his law firm and their client, notwithstanding that neither had the status of an "identifiable purchaser or seller" of securities).

(399.) See Nagy, Reframing Misappropriation, supra note 47, at 1287-1310; Nagy, Fiduciary Principles, supra note 47, at 1373-78.

(400.) See supra note 54 and accompanying text (quoting observations by Professors Henning and Hazen).

(401.) See Nagy, Fiduciary Principles, supra note 47, at 1361-62 (charting the gradual demise of fiduciary principles in insider trading decisions by lower federal courts, settled enforcement proceedings, and rules adopted by the SEC).

(402.) See SEC v. Dorozhko, 574 F.3d 42, 51 (2d Cir. 2009) (remanding case to determine whether computer hacking involved active deception).

(403.) See SEC v. Rocklage, 470 F.3d 1, 7 (1st Cir. 2006) (observing that a corporate executive's wife's disclosure that she intended to give her brother a "gift of information" negated a finding that her tipping was deceitful; but holding that the SEC stated a claim because the wife deceived her husband in her acquisition of that information).

(404.) See supra note 372 (quoting Professor Guttentag).

(405.) See United States. v. Salman, 792 F.3d 1087, 1089 (9th Cir. 2015).

(406.) Id.

(407.) See Nagy, Fiduciary Principles, supra note 47, at 1361; Nagy, Reframing Misappropriation, supra note 47, at 1301-03.

(408.) Chadbourne & Park LLP v. Troice, 134 S. Ct. 1058, 1069 (2014); see also supra text accompanying note 398.

(409.) Nagy, Fiduciary Principles, supra note 47, at 1377-78.

(410.) Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975).

Donna M. Nagy, C. Ben Dutton Professor of Law and Executive Associate Dean, Indiana University Maurer School of Law--Bloomington. Previous drafts of this Article have benefited from helpful insights and comments by Professors Brian Broughman, Jay Brown, Hannah Buxbaum, James Cox, Lisa Fairfax, Jill Fisch, Michael Guttentag, Joan Heminway, Peter Henning, Allan Horwich, Sung Hui Kim, Donald Langevoort, Leandra Lederman, Aviva Orenstein, Austen Parrish, Elizabeth Pollman, Adam Pritchard, Margaret Sachs, Hillary Sale, William Wang, Deborah Widiss, and Yesha Yadav, as well as from presentations at the 2016 Fiduciary Law Workshop at Duke University School of Law; Loyola Law School-LA; UCLA's Fall Conference on Defining the Boundaries of Insider Trading; and the 2015 Annual Meeting of the Southeastern Association of Law Schools. I am grateful for the excellent research assistance provided by IU Maurer Reference Librarian Jennifer Morgan.
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Title Annotation:IV. Legislative Developments B. Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) through VIII. Conclusion, with footnotes, p. 31-57
Author:Nagy, Donna M.
Publication:The Journal of Corporation Law
Date:Sep 22, 2016
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