Steve’s hypothetical is excellent in testing the outer limits of the personal benefit test, which was recently at issue in Salman v. US. Steve asks the question: Does CEO Treadwell’s disclosure of the confidential information about the merger to his psychologist constitute an illegal tip under SEC Rule 10b-5? My opinion is no, unless the purpose of Treadwell’s disclosure was to impart a trading advantage to his psychologist. Based on the described facts, it seems that Treadwell disclosed the information without a purpose to impart a trading advantage. Most likely, he did so inadvertently: he could have just said that “an important transaction” was in the works. If he did so inadvertently, he breached the duty of care, but we are reminded by SEC v. Dirks that breaches of the duty of care do not fall within the ambit of the insider trading prohibition.
Now, one might object that I am introducing another (unnecessary) element into the tipping analysis or confusing “purpose” with “scienter.” Maybe so, but I strongly believe that knowing the “purpose” of the disclosure, which is not always easy to do from an evidentiary standpoint, is essential to ascertaining whether the disclosure is or is not improper. For example, to prosecute the crime of public bribery, the prosecution must show the donor’s intent to influence the donee in the exercise of his official discretion. That is, more or less, a “purpose” element.
Of course, there will be evidentiary difficulties. Bill Klein’s first variant of the hypothetical suggests that Treadwell may have a purpose to impart a trading advantage. The facts of the second variant, however, make Treadwell look more innocent.
In my view, a quid pro quo should not be necessary to find liability for tipping. If the person is a relative, friend or acquaintance, a donative intent should suffice. Why? Because, as I described in my paper, Insider Trading as Private Corruption, the mere (intentional) use of an entrusted position for self-regarding gain (“self-regarding gain” to be defined broadly to encompass the personal (usually financial) gain of the insider’s friends, relatives and acquaintances) is improper, assuming such use is neither necessary nor incidental for the CEO to carry out the tasks and purposes of his position. Understanding insider trading as private corruption provides the intuition that not only bribes (tips for counter-tips or money) are improper, but less nefarious forms of reciprocity, such as gifts, are improper, as reflected in our aversion to cronyism and nepotism. To be sure, organized society cannot exist without the motivation to acknowledge and reciprocate a benefactor’s conferral of a benefit. But the domain of the securities markets is just not the place to indulge those (very human) impulses
