Keith Bishop alerts us to a troubling case:
In Dirks v. SEC, 463 U.S. 646 (1983), the United States Supreme Court found that a tippee may be liable for trading on the basis of material, nonpublic information if he or she knows that the tipper disclosed inside information in breach of a duty and for a personal benefit. The Court stated that a personal benefit may be inferred when the tipper receives something of value in exchange for the tip or "makes a gift of confidential information to a trading relative or friend". In Salman v. United States, 137 S. Ct. 420 (2016), the Supreme Court made it clear that the tipper need not receive something of pecuniary value from the tippee, it is enough that the tipper provided the information as a gift to a trading relative or friend.
Yesterday, the Securities and Exchange Commission filed a civil complaint alleging insider trading by two individuals - David Sargent and Christopher Klundt. Mr. Klundt was employed by the issuer in question and is alleged to be the tipper. Mr. Sargent is alleged to be the tippee. The SEC alleges that "Klundt communicated material nonpublic information to Sargent in exchange for a personal benefit or with the expectation of receiving a benefit". Noticeably lacking is any allegation as to what that benefit was. The complaint does include several allegations concerning the two defendants' friendship. It will be interesting to see whether these allegations of the defendants' amity will suffice under Salman and Dirks.
In effect, what the SEC is trying to do is to turn trading by tippees into a status crime. It is enough in the SEC's view that tipper and tippee are friends. This an extremely aggressive reading of Salman and Dirks.
The SEC's efforts in this area also appear to be an attempt to revive the discredited equal access theory. Under the SEC's approach, if the friend of a tipper has unequal access to information that suffices to hold him/her liable. Which the Supreme Court precedents do not allow.
As I explained in Equal Access to Information: The Fraud at the Heart of Texas Gulf Sulphur, 71 SMU L. REV. 643 (2018), available at https://scholar.smu.edu/smulr/vol71/iss3/3, that test was invented out of whole cloth by the Second Circuit and decisively rejected by the Supreme Court. But the SEC has never accepted that loss and has consistently tried to bring back equal access as the basic test.
