In the Courts

Riley presents a typical “tipper” liability case for insider trading, whereby the government must demonstrate that a defendant: 1) owed a duty of confidentiality with respect to material nonpublic information; 2) breached that duty by intentionally or recklessly relaying such information to a tippee who could be anticipated to trade thereon; and 3) did so in exchange for personal benefit. Riley II at 3.

On appeal, Riley contended, among other things, that under Newman , the trial evidence was insufficient to satisfy the personal benefit element and that the jury instruction on that element was inadequate. Id at 6-9. In Newman , the Second Circuit vacated the convictions of two downstream tippees of confidential information because the government failed to prove that the defendants knew that the information was disclosed by an insider in exchange for a personal benefit. Newman at 452. However, Newman offered no help to the former Foundry executive. First, the court found that the defendant's reliance on Newman was ill placed. It explained:

Newman holds that when a tipper's expectation of personal benefit is to be inferred from the personal relationship of the tipper and tippee, the government must prove “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.

Riley II at 6 (citation omitted).

However, the court distinguished Riley's case ' as the evidence introduced at trial supported an inference that Riley, the tipper, received an “immediately pecuniary” tangible benefit in the form of investment advice from Teeple. Such professional advice would constitute a benefit whether or not Riley used or profited from it. Riley did both. Id. In other words, trial evidence established a real pecuniary benefit received by Riley ' the investment advice ' such that it does not have to be further inferred from a close personal relationship between the tipper and tippee. This evidence included records indicating that Riley logged into a confidential Foundry online database and made profitable purchases of Motorola and Palm stock at the same time he was on a telephone call with Teeple. Id. at 6-7. In the court's view, this evidence was sufficient for a reasonable jury to infer the quid pro quo nature of Riley's tipping. Id.

Next, the court rejected Riley's challenge to the jury instruction regarding “personal benefit.” The challenged instruction was reviewed for plain error, and the court identified this standard was satisfied only if: 1) there was error; 2) that was clear or obvious, rather than subject to reasonable dispute; 3) that affected the defendant's substantial rights, generally by affecting the outcome of the trial; and 4) that seriously affected the fairness, integrity, or public reputation of judicial proceedings. Riley II at 8 (citation omitted). Riley's challenge failed on the third and forth elements, as the prosecution's evidence that Riley received an immediate pecuniary benefit in exchange for the inside information was “sufficiently compelling to leave [the court] with no doubt that a jury instructed consistent with Newman would have found Riley guilty.” Id. at 8-9.

Riley makes clear that even after Newman , the “personal benefit” requirement for tipper liability in insider trading cases does not require an exchange of money between the tipper and tippee. The “immediately pecuniary” tangible benefit for which a tipper traded the inside information may take many different forms and does not have to materialize into a real financial gain to the tipper.

In the Courts and Business Crimes Hotline were written by Mayer Brown associate Jing Zhang.