Insider Trading and Tippee Liability

In my view, the Newman case should not really have much impact in India. Unlike the insider trading (IT) prohibition in India which is very specific, the US prohibition is not to be found in statute, but has evolved thru judicial and administrative pronouncements. In fact, in Sameer Arora case, SAT acknowledged this. As against this, following US jurisprudence on manipulative and deceptive practices makes sense as SEBI Act provisions here closely track the language of Section 10(b) and Rule 10b-5 of the SEC Act and Rules respectively.
Tipee liability has been a tricky issue in the US because the US SC clearly rejected the equal access theory of IT prohibition in Chiarella. The prohibition there is based on classical (Chiarella, Dirks) and misappropriation (O’Hagan) theories. Both these are duty based theories. A person is prohibited from trading on MNPI only if such trading is in violation of her fiduciary duty or a similar duty of trust and confidence (to the issuer or the source of information respectively). Instead, if she discloses this information to another person (tipee), the tipee’s duty not to trade on it is only derivative of that of the tipper. Thus, the tipper must have breached her duty by disclosure and the tipee knew or should have known about such breach and still traded on such information.
The Dirks Court stated, “Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.” Thus, the personal benefit requirement is a necessary condition to establish a breach of duty. These two are not distinct as you seem to imply. The Second Circuit has correctly read Dirks on this. Also, the Circuit Court is right in rejecting mere friendship or social relationship to infer a personal benefit. To quote Dirks again, “This requires courts to focus on objective criteria, i. e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings.” So at some point of time, the insider must benefit in pecuniary terms. Leaving aside the implications of this position in terms of policy rationale and enforcement issues, the Newman decision is faithful to Dirks and correctly states the US legal position in the context of tipee liability.
We don’t know the details of the coming IT Prohibition Regulations in India. But the Sodhi Committee Report clearly and explicitly premises the prohibition on the equal access theory. It characterizes IT as the wrong of trading in securities with the advantage of having asymmetrical access to unpublished information. Under the equal access theory, the tipee’s liability not to trade on UPSI is not derivative of that of the trader, but arises independently due to her superior access to information. Therefore, the definition of `insider’ in the proposed regulations covers anyone who is in possession of UPSI (the accompanying legislative notes further explain the rationale). While an innocent recipient of UPSI can raise a defence, she is required to exercise diligence to form a reasonable belief that the information was not UPSI or communication of such information did not violate any law or confidentiality obligation. In particular, no `personal benefit’ enquiry is implicated here. Should a Newman style case be brought under the proposed regulations, it would be hard to argue (under reasonable man standard) that the said information (quarterly earnings announcements as yet unpublished) was not UPSI, or its communication was not in violation of confidentiality obligation. Thus, Newman and Chiasson would be clearly liable under the framework proposed by the Sodhi Committee.