Insider Trading Law Tightens Up for Tippers and Tippees

The Supreme Court speaks about insider trading, and it is not good for tippers and tippees.

I’m still going through the backlog of recent stuff.  Here’s an important update on insider trading.

For the first time in a long time, the Supreme Court provided new guidance on insider trading laws. The government had suffered a few high-profile defeats in this area over the last few years, but Salman v. United States provided more insight into indirect liabilities for insider trading while providing more ammunition to the government to go after indirect (tippee) insider trading defendants.

In Salman, A was an investment banker in Citigroup’s healthcare investment banking group. Over time, he regularly tipped off B, his brother. B also provided the information to other people, including C, B’s friend who was also A’s brother-in-law. A tangled web and all that . . .

In the classic Dirks case, a tippee, in this case C, is exposed to liability to insider trading if the tippee participates in a breach of the tipper’s fiduciary duty. The test is whether the insider will benefit, directly or indirectly, from the disclosure. Disclosure without personal benefit is not enough. However, a close, personal relationship can create an inference of benefit.

In 2014, the Second Circuit in Newman, a case involving a more distant relationship between the traders and the insider information, did not permit the inference without proof of 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.

The Ninth Circuit and the Supreme Court disagreed.

The Supreme Court said that the test is whether the insider personally will benefit, directly or indirectly, from the disclosure. Disclosure without personal benefit is not enough. However, the benefit can be inferred from objective facts and circumstances such as a relationship between the parties that suggests a quid or quo or intention to benefit the tippee.

The takeaway is that insider trading is not worth it. If caught, it is not that difficult to convict.* It just got easier. If the prosecution can show that there is a close enough relationship between the tipper and tippee, a jury can infer a benefit assuming that the transaction is no different than the tipper doing the trading and gifting the proceeds to the tippee.

*Sort of.  There are some pending articles about some more difficult cases for the SEC and prosecutors.

Interesting (believe it or not) Developments in Delaware Bylaw Law

Case tests company attempt to shift expenses related to stockholder violations of exclusive forum clause in corporate bylaws.

I’ve been out of the blog game for a while, so I am now catching up on older stuff that I find interesting.  Hopefully, it is not completely out of date.  But what could be more interesting than laws about corporate bylaws?

This post involves some recent developments in Delaware bylaws.  The short answer:

  • Exclusive forum clauses are okay
  • Fee shifting provisions, even for stockholder action violating the exclusive forum clauses are not okay.

So far, so good.

Case:  Solak v. Paylocity Holding Corporation, et al.

Brief Background

In response to another case, Delaware made a couple of changes to its corporations statute:

  • Section 115 was added to permit corporations to adopt bylaws requiring claims to be brought solely in Delaware if they are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or under the jurisdiction of the Court of Chancery; and
  • Section 109(b) was amended to provide that bylaws may not impose liability on a stockholder for attorneys’ fees or expenses of the corporation or any other party in connection with Section 115 claims.

Paylocity amended its bylaws to adopt exclusive forum bylaws and to impose liability on a stockholder who brings a Section 115 claim outside of Delaware.  Stockholders were not amused by the fee-shifting provision.

The court said that the plain text of the fee-shifting bylaw violates Section 109(b) despite Paylocity’s arguments that:

  • Section 109(b) must be read with Section 115, thus permitting fee shifting for violations of an exclusive forum bylaw (Court:  No exception in either provision to permit this exception to fee-shifting prohibition);
  • common law permits fee-shifting (Court: Fee-shifting is allowed in private contracts, which are not subject to the prohibition of Section 109(b)); and
  • the bylaw says “to the fullest extent permitted by law,” so it is limited (Court:  There is no extent to which it is permitted, so it is invalid.)