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Insider Trading Liability for Tippers and Tippees: A Call for the Consistent Application of the Personal Benefit Testby Nelson S. Ebaugh
Ebaugh, Nelson S., P.C. - Houston Office
University of Texas School of Law
Ebaugh, Nelson S., P.C. - Houston Office
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November 25, 2009
Previously published by Texas Journal of Business Law
on Fall 2003
In Dirks v. SEC, the United States Supreme Court held that in order to establish tipper/tippee liability under the classical theory of insider trading, the plaintiff must prove, among other elements, that the tipper gained a personal benefit from disclosing material, nonpublic information to a tippee. Until 1997, the classical theory was the only theory recognized by the Supreme Court to prove insider trading liability for the use of material, nonpublic information. In United States v. O’Hagan, the Supreme Court recognized two additional bases for establishing insider trading liability: (1) the misappropriation theory under Rule 10b-5 and (2) Rule 14e-3. The lower courts are divided as to whether proof of personal benefit is required in order to establish tipper/tippee liability under either the misappropriation theory or Rule 14e-3. This Article urges courts to incorporate the personal benefit test under the misappropriation theory and Rule 14e-3 for the same reasons that the Supreme Court developed the personal benefit test in Dirks.
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