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71 SMU L. Rev. 767 (2018)
Personal Benefit Has No Place in Misappropriation Tipping Cases

handle is hein.journals/smulr71 and id is 801 raw text is: 





  PERSONAL BENEFIT HAS No PLACE IN
    MISAPPROPRIATION TIPPING CASES*

              Merritt B. Fox** and George N. Tepe***


                          ABSTRACT

  The Supreme Court's decision in Salman v. United States left unan-
swered an important issue concerning the reach of Rule lOb-5's prohibi-
tions 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 per-
sonal 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 lOb-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.

                     TABLE OF CONTENTS
    I. SUPREME COURT JURISPRUDENCE CONCERNING
       INSIDER   TRADING   .....................................  768
       A. THE CLASSICAL THEORY AND ITS RELATION TO THE
           PERSONAL BENEFIT TEST .............................. 769
       B. THE MISAPPROPRIATION THEORY AND THE PERSONAL
           BENEFIT TEST'S IRRELEVANCE ......................... 770
   II. LOWER COURT TREATMENT OF THE PERSONAL
       BENEFIT TEST IN MISAPPROPRIATION CASES ..... 772
       A. THE SECOND AND FIRST CIRCUITS .................... 772
       B. THE ELEVENTH CIRCUIT .............................. 774

    * An earlier version of this article appeared as a blog post on the Columbia Law
 School Blue Sky Blog.
   ** Michael E. Patterson Professor of Law, Columbia Law School.
   *  Associate, Wachtell, Lipton, Rosen & Katz.

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