United States v. Whitman
904 F. Supp. 2d 363
S.D.N.Y.2012Background
- On August 21, 2012, a jury convicted Whitman of two counts each of conspiracy to commit insider trading and substantive insider trading.
- Whitman traded on material inside information the tippees received from insiders at Polycom, Google, and Marvell.
- Court addressed three unsettled questions about the source and scope of the duty not to disclose confidential information and the knowledge required for liability.
- Judge instructed the jury using Instructions 10 and 11, then provided detailed reasoning in this opinion.
- Court held the duty not to disclose confidential information is defined by federal common law, not state law, and that knowledge of a personal benefit to the tipper is required for tippee liability, with specific intent to defraud required for a Dirks-like case.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Source of the duty not to disclose confidential information | Whitman and others rely on state law (California) for fiduciary duty | Duty is defined by federal law, not state law | Duty defined by federal common law |
| Tippee liability—knowledge of tipper's breach and benefit | Tippee must know the breach and the benefit | Tippee need know breach potential, not specifics of benefit | Tippee must have general understanding of breach and benefit; specifics not required |
| Specific intent to defraud under Rule 10b-5 | Specific intent not required; general intent suffices | Standard aligns with fraud-like intent | Criminal insider trading under 10b-5 requires specific intent to defraud |
Key Cases Cited
- Dirks v. S.E.C., 463 U.S. 646 (1983) (tippee liability hinges on insider’s breach and tippee’s knowledge of it)
- Chiarella v. United States, 445 U.S. 222 (1980) (fiduciary or similar relation of trust may create duty to disclose or abstain)
- Carpenter v. United States, 484 U.S. 19 (1987) (misappropriation theory development in insider trading)
- O’Hagan, 521 U.S. 642 (1997) (extensive discussion of insider trading duties and Rule 10b-5)
- Ernst & Hochfelder, 425 U.S. 185 (1976) (recognizes need for scienter in securities fraud)