No More Quid Pro Quo: Abandoning the Personal Benefit Requirement in Insider Trading Law

A circuit split between the Second Circuit’s 2014 decision, United States v. Newman, and the Ninth Circuit’s 2015 decision, United States v. Salman, illustrates problems in insider trading law dating back over thirty years to the Supreme Court’s decision in Dirks v. SEC. Dirks held that when a corporate insider provides information to an outside party who then trades on the information, it must be shown that the insider received some form of a personal benefit for providing the information in order to impute liability. The courts in Newman and Salman disagreed on the sort of evidence that suffices to prove such a personal benefit. As this question is set to be decided by the Supreme Court, these cases provide an apt opportunity for reexamining the law of insider trading. Although it might be argued that, for both moral and efficiency reasons, the courts in Newman and Salman reached the right outcome, the analysis in both decisions was strained as a result of the personal benefit requirement first articulated in Dirks. As this Note discusses, this split demonstrates that proof of a personal benefit as an element of insider trading in tipper/tippee cases should not be required, as it creates unnecessarily subjective inquiries into the relationship between the tipper and tippee, resulting in confusion in the boundaries of permissible trading activity. Because insider trading walks a fine line between behavior that should be encouraged (the use of information for legitimate business purposes) and discouraged (exploiting information obtained by virtue of an inside position for personal gain), it is important to more clearly define the bounds of insider trading activity. In place of requiring proof of a personal benefit, this Note argues that a wholly new statutory approach to insider trading is warranted and offers an alternative statutory proposal that may serve as a starting point for a discussion of adopting legislation.