The Misconceived Personal-Benefit Requirement of Insider Trading Law: About the Insecurities Markets

In Dirks v. SEC and Salman v. United States, the Supreme Court held that, under Section 10(b) of the Securities Exchange Act, tipper/tippee liability arises only if the tippee confers a benefit on the tipper. The ostensible justification for this rule arises from a mistaken premise. The error is rooted in the so-called classical theory of insider trading. When a corporate insider trades on material, nonpublic corporate information, the Supreme Court has held that the insider faces liability because that person profited from the trade.

Building on this mistaken premise, the Court has held that when a tipper receives a personal benefit from the tippee, that benefit functions as a proxy for the profits the insider would have made had the insider, rather than the tippee, traded. This Article argues that the Court has misconceived the nature of insider trading liability. When an insider trades on confidential corporate information, the wrongful act is making an unauthorized trade. Whether a corporate insider profits from the trade is irrelevant.

Even if the insider loses money, the insider has nevertheless committed the same wrongful act: the trade itself. Thus, in a tipper/tippee situation, the tippee’s trade stands as a proxy for the trade the tipper might have made. That trade is a deceptive and manipulative device, which violates section 10(b).