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Abstract

When Dirks v. SEC set the stage and the basic script for insider trading based on tipper-tippee liability, it firmly established that a tipper needed to receive a personal benefit or gain for either the tipper or tippee to be held liable for insider trading. Without a personal benefit, there is no breach of duty to the corporation’s shareholders, and, without that breach of fiduciary duty, there is no illegal insider trading. The lower courts subsequently modified the personal benefit requirement, generally weakening the element, and making it easier to find someone guilty of committing insider trading. The Second Circuit’s recent opinions in United States v. Martoma epitomize this trend and have resulted in significant changes to the personal benefit requirement contrary to Dirks. Although both Martoma I and Martoma II purport to use the same stage settings and script established by Dirks, the Second Circuit effectively removed and eliminated Dirks’s personal benefit requirement.

This Note argues that the personal benefit should return to the standard established by Dirks and affirmed by Salman, thereby restoring the personal benefit to the insider trading stage and requiring the Government to prove that a tipper has received a personal benefit in exchange for the disclosure of material nonpublic information. Without adhering to Dirks, courts risk penalizing defendants for merely possessing material nonpublic information or, at the least, based on vague standards that prevent the public from knowing when their conduct is contrary to the law, which is a result consistently rejected by the Supreme Court. Part II of this Note provides the background for illegal insider trading and describes the stage for tipper-tippee liability. Parts III and IV analyze the changes made to the stage, culminating in the removal of the personal benefit in Martoma I and Martoma II, and the consequences of those changes. Part V discusses why returning to the personal benefit requirement as established by Dirks is the most practical solution to resolving some of the problems created by the lower court’s treatment of the personal benefit and who should reset the stage.

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