47 B.C. L. Rev. 547 (2005-2006)
Old Rule, New Theory: Revising the Personal Benefit Requirement for Tipper/Tippee Liability under the Misappropriation Theory of Insider Trading

handle is hein.journals/bclr47 and id is 557 raw text is: OLD RULE, NEW THEORY: REVISING THE
PERSONAL BENEFIT REQUIREMENT FOR
TIPPER/TIPPEE LIABILITY UNDER THE
MISAPPROPRIATION THEORY OF
INSIDER TRADING
Abstract: Under the classical theory of insider trading, tipper/tippee li-
ability may arise only when the tipper makes the relevant disclosure to
obtain a personal benefit. Courts are divided, however, as to whether
this personal benefit requirement applies to the misappropriation the-
ory of insider trading. This Note argues that because the personal
benefit requirement is severely flawed, courts should not impose it in
misappropriation cases. Instead, courts adjudicating misappropriation
cases should require that (1) the tipper was at least reckless as to
whether he or she would either benefit personally or harm the informa-
tion source by tipping, and (2) the tipper was at least reckless as to
whether someone in the line of tippees would use the information to
trade. This standard should be subject only to the tipper's defense that
the disclosure was made in a good faith attempt to prevent criminal ac-
tivity reasonably certain to cause substantial physical or financial harm
to others.
INTRODUCTION
Suppose that you, the CEO of Acme Corporation, disclose to
your Vice President that your company plans to make a tender offer
for Zen Corporation.' You warn the Vice President that this informa-
tion is sensitive and confidential and must not be discussed with any-
one outside of the office. He agrees to keep the secret. Unbeknownst
to you, however, the Vice President dislikes you and your company,
plans to quit soon, and does not feel particularly loyal.
After work, the Vice President gets a haircut. During the haircut,
the barber asks the Vice President whether Acme Corporation plans
to buy any other companies soon. The Vice President knows the bar-
ber is an avid stock trader because the barber often talks about his
investments. He also believes that the barber is probing for informa-
For a set of facts similar to those provided in this hypothetical, see SEC v. Maxwell,
341 F. Supp. 2d 941, 943-45 (S.D. Ohio 2004).

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