SEC Remote Tippee Cases Now Subject to Higher Newman Standard

The heightened Newman requirements for remote tippee liability apply not only in criminal cases but also in civil cases brought by the SEC.  On April 6, 2015, in SEC v. Payton, Judge Rakoff of the Southern District of New York ruled that the principles set forth in the criminal case, U.S. v. Newman (2d Circuit), apply equally in civil cases brought by the SEC.  That means, among other things, that the SEC must prove that the original tipper received a significant personal benefit from the original tippee.

As Judge Rakoff pointed out, however, there is an important distinction between a remote tippee case brought by the DOJ and one brought by the SEC.  While the DOJ must prove the remote tippee actually knew of the of the personal benefit provided to the original tipper by the original tippee, the SEC can rely on the lower “recklessness” standard.  Recklessness includes conscious avoidance of learning whether there was a direct quid quo pro between the original tipper and tippee.  Thus, in a case where a remote tippee has enough circumstantial facts at hand to raise red flags but refuses to search out whether there is a quid quo pro between the original tipper and tippee, the remote tippee may be civilly liable.

By applying Newman to SEC cases, the Court made it clear that the Government will have to be careful in bringing remote tippee cases, whether they are civil or criminal.  That said, all other things being equal, the safer path for the Government will likely be to go the SEC/civil route.

Judge Rakoff’s decision can be found here.  http://www.scribd.com/doc/261139623/SEC-v-Payton-Rakoff-Opinion-April-6-2015

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