Mark Ramseyer on the Salman Personal Benefit Standard for Tipping Liability
Ever since Dirks, questions like this have plagued my Corporations classes. I used to think that the benefit requirement in Dirks was just a mistake. Powell tells us that 10b-5 hinges on whether the tipper breached a fiduciary duty, and that the fiduciary duty requirement turns on a personal benefit. But we know that’s wrong. Fiduciary duty doesn’t just include the duty of loyalty; it also includes the duty of care. Did Powell (or a clerk of his) just forget that half of corporate law?
But apparently, the Supreme Court has decided that Powell meant what he said. If a Wachtell associate comes down the elevator late at night and a pair of Goldman Sachs employees get on the elevator and keep chatting about the tender offer they’re working on, the Wachtell associate can trade. They’re careless, but that’s not a benefit. And Barry Switzer can trade. Switzer testifies that he overheard the information about the upcoming reorganization because he was sitting behind his close friend at the racetrack. His friend was the head of the Oklahoma boosters, and the friend needed to tell his wife why he was going to be out of town. His friend was careless, but that doesn’t count for purposes of the benefit requirement. But Sandy Weill’s wife’s psychiatrist (Dr. Willis) cannot trade.
I used to use questions like this for my exam every year. They seemed ready made for law school exams.
But on the question posed here, I turn legal realist: the Supreme Court’s not going to interfere with psycho-therapy. Never. I clerked for Steve Breyer before he was famous, and I worked for Elena Kagan. They both have much too much common sense to do anything like that. Steve is quite right to pose the logical problem that he does here — it’s a nice question, and I don’t know how the Supreme Court will maneuver around the logical problem they created. But they will. No, someone who tells his or her shrink about something in his or her life that’s causing stress is not going to get in trouble. Never.
But then back to the exam question: suppose Sandy Weill’s wife says to Willis: “Sandy and I quarreled. He canceled my credit card. I’m broke. I can’t pay for my session today. Suppose I told you about his plans to takeover the Bank of America, and told you that you were free to trade on it.” Now there’s a benefit. And Willis doesn’t breach any duty of trust and confidence if he trades — because she explicitly told him he could trade. But did she breach a fiduciary duty when she told him? The Second Circuit tells us that husbands and wives don’t owe each other a fiduciary duty (that was news to me when I heard it). 10b5-2 does say that she breaches a “duty of trust and confidence” when she does this. Is that good enough?