Steve's
provocative post asks us, through the use of a hypothetical and a focus on the tipper, what the outer limits of the personal benefit requirement are. To answer that question, I step back to why we have the personal benefit requirement in the first place. In short, under
Dirks, the personal benefit requirement exists to enable us to determine whether a person with a duty to disclose or abstain is breaching that duty by improperly sharing material nom-public information. Specifically, in
Dirks, the Court states:
[S]ome tippees must assume an insider's duty to the shareholders . . . because it has been made available to them improperly. And, for Rule 10b-5 purposes, the insider's disclosure is improper only where it would violate his Cady, Roberts duty. Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.
463 U.S. 646, 660 (1983) (footnotes omitted). We care about that breach because the breach creates the deception necessary to violate Section 10(b) (which prohibits manipulation or deception in connection with the purchase or sale of a security) and Rule 10b-5 as the doctrinal roots of U.S. Insider trading law applicable to the problem posed by the hypothetical.
Starting at this place, I could just duck the precise question asked and merely assess whether the sharing of the information by the CEO to the psychologist is improper (because of personal benefit or otherwise—assuming the personal benefit test is just one way to determine that). Is it inconsistent with the CEO’s duty to disclose or abstain? That would be the case if the CEO shared the information in self-interest rather than for the benefit of the firm or its shareholders, the beneficiaries of the CEO’s duty to disclose or abstain. I might want more facts to be able to assess that matter, since the facts posed in the original hypothetical indicate no assessment by the CEO of the interests of those constituents.
Read in that light, however, the personal benefit test allows us to assess self-interest. Offering information about confidential corporate dealings to anyone who does not “need to know” that information for the benefit of the firm and shareholders in order to improve one’s mental health would seem to be enough of a personal benefit to constitute the improper sharing of information. Moreover, if, under the first Bill Klein enhancement to the hypothetical, the CEO receives special treatment in getting appointments, that looks like self-interest. The second Bill Klein enhancement offers more sensitivity on the CEO’s part to not sharing information improperly—maybe balancing the CEO's health-value to the firm and its shareholders against the possibility that the information could be misused in the wrong hands. (This certainly substantiates a lack of scienter, by the way, apropos of your comments on that element of the claim in your post.)
Moving on to an attempt at the bonus questions, as a lawyer who wrote and advised insiders on insider trading compliance plans for a living in a prior stage of my career, if I were the corporation’s legal counsel, I would advise the CEO not to share any information about forthcoming transactions as part of the therapy. The lawyer should invite the client’s officer to “color between the lines” when at all possible. I suppose in part my reaction in that regard stems from the feeling that the transactional details are not needed for purposes of receiving treatment, however. And that may be incorrect. Bottom line: the lawyer must act in the interests of the client—the firm—and not the CEO. As to whether the lawyer must disclose the mental health of the CEO to the board, well, that also relates to the lawyer’s duty to the client. I am not professional responsibility expert, but I believe this is a Model Rule 1.13(b) question. If the lawyer knows that the CEO “is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization,” then the lawyer has to take action, and that action may include disclosure to the board. But I would want to think more about that . . . . I note that Comment 2 to the rule expressly notes that Rule 1.6 governs communications with the CEO:
When one of the constituents of an organizational client communicates with the organization's lawyer in that person's organizational capacity, the communication is protected by Rule 1.6. . . . This does not mean, however, that constituents of an organizational client are the clients of the lawyer. The lawyer may not disclose to such constituents information relating to the representation except for disclosures explicitly or impliedly authorized by the organizational client in order to carry out the representation or as otherwise permitted by Rule 1.6.
Again, I continue to think about all this and find the hypothetical and its focus on the tipper quite inviting . . . .