“Much like the game of telephone, the final recipient of inside information may know little about who started the process or how many steps it took before arriving. When prosecutors want to pursue charges against the recipients of confidential information — the “tippees” — the issue is often how far down the chain they can go before they can no longer prove a violation.”

“How much knowledge a defendant must have is often crucial in white-collar crime cases because the issue is rarely about what the person did, but what was intended. Figuring out what a recipient has to know has become a central issue in the appeal of Anthony Chiasson and Todd Newman, two former hedge fund managers who were way down on the chain of inside information about two technology companies, Dell and Nvidia. But they were still convicted. Their appeal was heard on Tuesday.”

“Mr. Chiasson and Mr. Newman got information about upcoming company earnings that was traceable to insiders. But they never dealt directly with the sources of the information. Instead, the information was passed through a phalanx of analysts before finally reaching them. In the parlance of insider trading, they were “remote tippees,” well removed from the original tippers.”

“A recipient can still be held responsible for insider trading as long as the government shows that person knew the tipper breached a duty of trust and confidence to the source of the information by passing it along to someone who would profit by trading on it. To prove that breach, the Supreme Court stated in Dirks v. S.E.C., “The test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders.”

“Referred to as the quid pro quo requirement, the benefit received by the tipper can be monetary or just the warm feeling generated by making a gift to family or friends. It can even be a more ephemeral benefit like enhancing one’s reputation in the eyes of the recipient.”

“If this all sounds rather opaque, that’s because the law of insider trading has been developed piecemeal by the courts over the past 40 years. There is no specific statute outlining the elements of the violation. Instead, it is considered a species of securities fraud. So judges have been left to define its contours.”

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Read full New York Times article here.