Friends and Benefits: Why Newman's Stringent Personal Benefit Test Should Be Adopted

This Article analyzes the current Circuit split about the interpretation of the “personal benefit” test, which defines the scope of insider trading liability for tippees. In United States v. Newman, the Second Circuit held that, in order to satisfy the personal benefit test, the tipper and tippee must have a “meaningfully close personal relationship that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” In United States v. Salman, the Ninth Circuit rejected this test. The Supreme Court granted certiorari in Salman, and this Article seeks to provide guidance to the Court. First, this Article argues that Newman’s stringent personal benefit test is within the borders of Dirks v. SEC, the case in which the Court first pronounced the personal benefit test. Second, this Article examines the positive and negative effects of a more stringent personal benefit test. Finally, drawing therefrom, this Article recommends the adoption of the Newman personal benefit test. Somewhat ironically, the outcome in Salman would likely be the same under Newman because a pecuniary gain can be inferred from a familial relationship. Beyond Salman, however, adopting the Newman test would protect securities analysts and other distant acquaintances from unwarranted insider trading prosecution.