Cadwalader attorneys analyzed the order from the U.S. District Court for the Southern District of New York ("SDNY") vacating the guilty plea of former investment portfolio analyst Richard Lee.
In United States v. Lee, Mr. Lee was prosecuted for charges relating to insider trading based on confidential information obtained from an investment research firm that, in turn, received the information from company insiders. As explained in the Cadwalader memorandum, the court said that Mr. Lee was a "remote tippee" (i.e., someone that is multiple steps removed from the source, or tipper, of the confidential information). Thus, the court concluded that Mr. Lee could be held liable for insider trading only if (i) the tipper received a "personal benefit" for disclosing the confidential information and (ii) the defendant knew that the information was confidential and the tipper received a personal benefit. Because no evidence that Mr. Lee knew of any personal benefit received by the tipper was before the court at the time of his plea, the court held that his guilty plea was insufficient under Rule 11 of the Federal Rules of Criminal Procedure.
This memorandum was authored by Jason Halper, Kyle DeYoung, Adam Magid and James Orth.
Commentary / Jason M. Halper
Judge Gardephe's order demonstrates the lasting significance of United States v. Newman in insider trading prosecutions in the Second Circuit. The order makes clear that a tippee's guilty plea will not be sustained unless there is sufficient evidence to establish all elements of tippee liability, including that (a) the tipper received a "personal benefit" and (b) the defendant—no matter how many steps removed from the tipper—knew of that benefit. Although this is not the first time a Southern District judge has vacated a guilty plea on this basis, it confirms that the requirements remain valid and Newman continues to have force today. While some viewed the Supreme Court's 2016 decision in Salman v. United States as eviscerating Newman, the order reconfirms that is not the case. As Judge Gardephe noted, Salman did not call into question Newman's core holding regarding the elements of tippee liability, but merely abrogated Newman to the extent it held that "the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends" in order to meet the personal benefit element.
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