June 2016

ALERT – New Circuit Court Ruling Addresses Insider Trading Standard

Gregory J. O’Connell and Vera M. Kachnowski

It its recent decision in United States v. Parigian, No. 15-1994, issued on May 26, the First Circuit waded into the murky waters concerning the “personal benefit” element of insider trading. The Supreme Court will be considering similar issues next term on certiorari to the Ninth Circuit Court of Appeals’ decision inUnited States v. Salman. In Parigian, a corporate insider allegedly shared material, non-public information with a friend, who misappropriated that information by sharing it with defendant Parigian, who then traded upon it. After Parigian unsuccessfully moved to dismiss his indictment, he conditionally pled guilty pending appeal of his motion to the First Circuit. Among other alleged deficiencies in the indictment, Parigian contended that it failed to allege a personal benefit to the corporate insider and to adequately allege a personal benefit to the misappropriator/tipper.

The First Circuit rejected the notion that any personal benefit to an insider must be alleged in a misappropriation theory case since the insider had no expectation that the shared information would be misused. As for whether a personal benefit to the misappropriator/tipper is a necessary element, the First Circuit took guidance from recent civil actions and determined that a criminal proceeding “would seem to call for the same answer.” Namely, “if a benefit is required,” the indictment’s allegations of a friendship between Parigian and the misappropriator plus an expectation of various luxury items in return for the tips is enough to allege a benefit to the misappropriator.

In so holding, the First Circuit recognized that the Second Circuit in United States v. Newman has adopted a “more discriminating definition of the benefit to a tipper in a classical insider trading case,” while the Ninth Circuit in Salman” seems to align itself more closely” with prior First Circuit case law. Newmanheld that a personal benefit cannot be inferred from a personal relationship between tipper and tippee, “absent 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.” By contrast, Salman held that proof of intent to benefit a trading relative or friend is sufficient to establish a personal benefit. The Parigian panel did “not venture to say” how these contrasting views would be reconciled.

The Parigian opinion also raised several interesting issues that it did not decide. It noted that “one might reasonably question” whether a misappropriator’s duty to a corporate insider can be appropriately alleged in a criminal insider trading case by reference to SEC Rule 10b5-2. In addition, it questioned whether the civil “knew or should have known” standard is appropriate for criminal insider trading actions. The First Circuit stated in dicta that “there is simply no reason why the mens rea requirement of scienter that routinely and presumptively applies in criminal cases would not apply [] where Congress has given no indication that it should not.” These issues warrant further attention, in addition to the “personal benefit” question which will be reached by the Supreme Court next term.