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Insider Trading Rule: 'Gratitude' Can Be a 'Personal Benefit'

By Jonathan R. Tung, Esq. on August 09, 2016 | Last updated on March 21, 2019

The First Circuit affirmed a pair of consolidated insider trading convictions in which general gratitude for being a tippee could be considered a personal benefit under federal securities laws. The same goes for wine, steak and massage parlors.

If that doesn't worry you, that's probably because you don't golf too much.


In the McPhail case, the defendant had a long-established relationship with a corporate executive. The lower court established that the relationship between the men was actually quite close: they frequently golfed together, saw each other several times a week, and would even mediate each other's marriages when marital complications arose. The executive-tippee in question had also loaned McPhail money to repay a gambling debt that the latter was trying to hide from his wife. The sum was later even forgiven entirely.

During these personal get togethers, the executive passed on material non-public information which McPhail later passed on to a third-party, Parigian, who profited from it. McPhail was indicted and later convicted under the misappropriation theory. The government argued that McPhail essentially breached a duty of confidence as to the executive and that he should have known that the executive expected McPhail to maintain confidentiality.

Mens Rea

McPhail took issue with the "knew or should have known" language upon appeal and argued that the jury should have been required to find that he actually did know that he was breaching a duty to the executive. His contention was that this instruction changed the whole proceeding. But the court dug in its heels and looked to both the Sixth and Seventh circuits which specifically used the "knew or reasonably should have known" language. The mens rea instruction was not a plain error.

Receipt of Personal Benefits

More importantly was the First Circuit's reiteration of what constitutes as "personal benefit" under insider trading laws. This lynchpin element can apparently be satisfied "by benefits as thin as 'reconciliation with [a] friend' and the maintenance of 'a useful networking contact,' ... or 'the mere giving of a gift to a relative or friend.'"

In other words, the circuits appear to be increasingly willing to entertain all sorts of amorphous benefits as satisfying the "personal benefits" element of insider trading. Caution is never a bad thing -- and practitioners would do well to warn their clients from talking too openly about juicy trading tips.

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