The Supreme Court’s decision in Salman v. United States left unanswered an important issue concerning the reach of Rule 10b-5’s prohibitions with respect to trades based on a tip of material inside information: in cases based on the misappropriation theory, is it necessary to show that the tipper enjoyed a personal benefit of which the trader was aware? The personal benefit test was originally developed in the context of tipping cases based on the classical theory of insider trading. The Supreme Court in Salman explicitly said that it was not reaching the matter of whether the test should be extended as well to tipping cases based on the misappropriation theory. And there is nothing in the language of Chiarella, Dirks, and O’Hagan—the earlier seminal Supreme Court cases relating to the reach of Rule 10b-5’s prohibitions on insider trading—that calls for doing so. The lower courts, however, have split on the issue, and in recent years a number of them, through a set of statements unaccompanied by reasoned analysis, seem to be sleepwalking into inserting the personal benefit requirement into misappropriation-theory-based tipping cases. We show that this recent drift is seriously misguided as a matter of both doctrine and policy. Allowing this errant doctrine to become firmly lodged in the law would needlessly leave many socially undesirable trades unpunished and hence undeterred.
Merritt B. Fox et al.,
Personal Benefit Has No Place in Misappropriation Tipping Cases,
SMU L. Rev.