Publications

(Article from Securities Law Alert, March 2015)

For more information, please visit the Securities Law Alert Resource Center.

To sustain an insider trading conviction against a tipper, the government must establish that the tipper “personally . . . benefit[ed], directly or indirectly, from his disclosure” of confidential information to an outsider. Dirks v. S.E.C., 463 U.S. 646 (1983). In United States v. Newman, 773 F.3d 438 (2d Cir. 2014) (Parker, J.), the Second Circuit held that the government may not “prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.”[1]

On March 3, 2015, the Southern District of New York ruled that a “personal benefit” could be found under Newman “[i]f a tip maintains or furthers a friendship, and is not simply incidental to the friendship” because this may be “circumstantial evidence that the friendship is a quid pro quo relationship.” United States v. Riley, 2015 WL 891675 (S.D.N.Y. 2015) (Caproni, J.).

Background

The case before the Southern District of New York concerned the insider trading conviction of David Riley, Foundry Network’s former Chief Information Officer. Riley had allegedly disclosed material, nonpublic information (“MNPI”) with respect to Foundry’s sales data and acquisition prospects to Matthew Teeple, a hedge fund analyst. The trial court’s “charge permitted the jury to find that Riley had obtained a personal benefit in exchange for the MNPI . . .  if he [had] provided the information for the purpose of ‘maintaining or furthering a friendship.’” The jury convicted Riley on two counts of securities fraud and one count of conspiracy to commit securities fraud.

When the Second Circuit issued its decision in Newman, 774 F.3d 438, Riley moved for a new trial or, alternatively, a judgment of acquittal. Riley contended, inter alia, that the trial court’s “instruction to the jury regarding the personal benefit element of securities fraud was erroneous in light of Newman.”

Southern District of New York Finds That Information-Sharing to Maintain or Further a Friendship Suggests a Quid Pro Quo Relationship

The Southern District of New York acknowledged that under Newman, “‘the mere fact of a friendship, particularly of a casual or social nature,’ between the tipper and the tippee is not sufficient evidence that a personal benefit inured to the tipper” (quoting Newman, 774 F.3d 438). The court observed that here, however, the trial court’s “instruction to the jury did not permit it to convict just because Teeple and Riley were friends.” Rather, the trial court’s charge “required that the tip be given to ‘maintain[ ] or further[ ] a friendship.” The Southern District of New York determined that “[i]f a tip maintains or furthers a friendship, and is not simply incidental to the friendship, that is circumstantial evidence that the friendship is a quid pro quo relationship.” The court emphasized that “[t]he existence of some quid pro quo is the sine qua non of tipper liability for insider trading.”  

The court found that Newman does not preclude a finding of “personal benefit” based on the maintenance or furtherance of a friendship, as distinguished from the “mere” existence of a friendship. In Newman, the Second Circuit recognized that a “personal benefit” could be found if there was “proof of a meaningfully close personal relationship that generate[d] an exchange that [was] objective, consequential, and represent[ed] at least a potential gain of a pecuniary or similarly valuable nature” (quoting Newman, 773 F.3d 438). The court explained that under Newman, “[t]he tipper’s gain does not have to be ‘immediately pecuniary,’ but ‘the personal benefit received in exchange for confidential information must be of some consequence’” (quoting Newman, 773 F.3d 438 (emphasis in original)). The Newman court “acknowledge[d] . . . that a tipper has received a personal benefit when there is ‘a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the latter’” (quoting Newman, 773 F.3d 438).

Based on this analysis, the Southern District of New York concluded that the trial court’s jury instruction was not “plain error” under Newman. Although the Second Circuit might eventually “rule that merely maintaining or furthering a friendship is not a sufficient personal benefit” for purposes of an insider trading conviction, the court found that it was “not ‘plain’ that the Second Circuit ha[d] done so already” in Newman.

Southern District of New York Determines That Any Rational Jury Would Have Found That Riley Had Obtained a “Personal Benefit” from the Disclosure at Issue

The Southern District of New York found that even if the trial court’s charge to the jury had been erroneous, the error had no impact on Riley’s “substantial rights” because “any rational jury would have found, beyond a reasonable doubt, that Riley [had] obtained a personal benefit from providing MNPI to Teeple.” The court determined that “[a]t a minimum, Riley [had] obtained three concrete personal benefits that were ‘objective, consequential, and represent[ed] at least a potential gain of a pecuniary or similarly valuable nature’” (quoting Newman, 773 F.3d 438). First, “Teeple provided Riley with access to his many contacts,” including in connection with Riley’s “side business” and “his job search.” Second, Teeple gave Riley “investment advice (which Teeple provided to others, but not for free).” And third, Teeple offered “insight into the companies with whom Riley was pursuing opportunities.”

The court held that “[t]he relationship between Riley and Teeple was clearly a quid pro quo relationship in which each was trying to help the other; Riley’s quid was Foundry’s MNPI.” The court therefore denied Riley’s motion for both a new trial and for a judgment of acquittal.