On April 4, 2012, President Obama signed the Stop Trading on Congressional Knowledge Act (the "STOCK Act"), and the House Committee on Ethics issued the first set of guidance under the STOCK Act (see memorandum). Among other things, the STOCK Act confirms that Congressional Members and staff, and federal executive and judicial branch officials, owe a duty with respect to material, nonpublic information derived from the person's position with the federal government under the insider trading provisions in Section 10(b) of the '34 Act and related SEC Rule 10b-5. In other words, information held by such federal officials qualifies as inside information upon which an insider trading case can be based if it is shared. Although much has been said as to when a federal official can be liable as a "tipper" in an insider trading case, the following focuses on the “tippee” liability that can accrue to the company with which the official shares such information.
A company’s tippee liability is derivative of the tipper’s liability; that is, a tippee will not be found liable unless the tipper is found to be liable. For a tipper to be liable, he or she must (1) disclose material, nonpublic information to the tippee in breach of his or her fiduciary duty and (2) receive a personal benefit as a result of the disclosure. While the interpretation by the courts of "personal benefit" has not been consistent, it is important to note that a number of courts have broadly interpreted this requirement, for example finding the passing of information to maintain goodwill with the tippee sufficient to meet the test. If the elements of tipper liability are satisfied, tippees can be held liable if the tippee (1) acts on the information, and (2) knows, or reasonably should know, that the tipper's disclosure is in breach of his or her fiduciary duty.read more