“Ruling Puts Dent In Insider Probes,” Wall Street Journal, December 11, 2014 A1. The Second Circuit Court of Appeals reverses two insider trading convictions, on the grounds that the original tippers didn’t receive a benefit for their tips.
Curious analysis that bears upon information governance. Directors and others inside a corporation have a duty not to disclose confidential company information outside the company, or to use that information for their own benefit. But, apparently, as long as that disclosure is not in return for a benefit to themselves, the tip does not lead to insider trading liability under federal security laws for people downstream who use the non-public information to profit on stock trades.
I am not an expert on insider trading. But it strikes me that the Court in this case relies too heavily on a statement in a prior Supreme Court case that held that an insider who discloses inside information to expose a fraud does not violate his/her fiduciary duty. The Supreme Court used somewhat loose language, saying that in the absence of a personal benefit, there was no breach of fiduciary duty. Seems that what they may have meant is that the fiduciary duty does not require concealing a fraud. Hard to believe that negligent disclosure of confidential information is okay.
Lessons? Do Directors and employees have a duty not to disclose confidential company information? Yes. Does an action for breach of that duty require a showing of personal benefit? Yes, if the action is under the federal securities laws; maybe not if the action is solely for the breach itself. Does the Supreme Court sometime write with less than 100% clarity?