Insider trading liability does not stop with the person who holds the information. It follows the information as it moves. When an insider passes material non-public information to someone who then trades, a tippee, both the insider (the tipper) and the recipient can be liable. But not every tip creates liability. The line the law draws runs through one question. Did the insider receive a personal benefit from the disclosure?
The Dirks framework
Dirks v. SEC (1983) built the test still in use. An analyst learned of a massive fraud at an insurer from a former employee, verified it, and told clients who sold before the fraud became public. The SEC censured him. The Supreme Court reversed, and in reversing set the rule for everyone downstream of an insider.
A tippee's liability is derivative. It depends on the tipper having breached a fiduciary duty. And the tipper breaches that duty only when the disclosure is made for a personal benefit, a gain to the insider. Absent a personal benefit, there is no breach. Without a breach, the tippee inherits nothing to be liable for. The former employees who tipped Dirks had exposed a fraud, not sought a benefit, so there was no breach and Dirks could not be a guilty tippee.
Dirks described the benefit broadly. It need not be cash. It can be a reputational gain that translates into future earnings, a quid pro quo, or a gift of information to a trading relative or friend. That last phrase has done the most work since, and the Court said such a gift resembles the insider trading themselves and then handing over the proceeds.
The tippee's knowledge
A tippee is liable only when they knew, or had reason to know, that the information came from an insider who breached a duty by disclosing it. Two elements travel together, the tipper's breach for personal benefit and the tippee's knowledge of that breach. A person who trades on a tip with no reason to think it came from a faithless insider does not meet the standard. A person who understands they are receiving a leak from someone who should not be giving it does.
Salman and the gift theory
For years the personal-benefit test was narrowed. In United States v. Newman (2014), the Second Circuit read Dirks to require, for a gift among friends, proof of a relationship generating an exchange that was pecuniary or similarly valuable. Salman v. United States (2016) resolved the question the other way. An insider tipped his brother, who tipped Salman, a relative by marriage. Salman traded knowing the source. The Supreme Court held unanimously that an insider's gift of confidential information to a trading relative or friend is itself enough to establish the personal benefit, with no pecuniary exchange required. To the extent Newman demanded something pecuniary or similarly valuable, Salman rejected that as inconsistent with Dirks.
So a tip to a close relative or friend who trades will, without more, support the inference that the insider benefited. The gift is the benefit.
Remote tippees and the chain
Information rarely moves once. It passes down a chain, from insider to friend, friend to friend, friend to trader. Liability can follow the chain, but each downstream trader is liable only if they knew or had reason to know the information originated in a breach for personal benefit. The further down the chain, the harder that knowledge is to prove. But hearing something thirdhand is not a safe harbor when the circumstances make the source's breach obvious.
What this means for your program
For covered persons, the practical lesson is that the risk is not only trading. Passing material non-public information along, to a spouse, a friend, or a contact at another firm, is itself the conduct these cases punish, and the tipper is liable whether or not they trade a single share. A policy that tells people "do not trade on inside information" but says nothing about talking has addressed half the problem. Teach the covered population that the information is not theirs to give, and that the person they hand it to becomes their exposure. See also "MNPI handling, who's inside, when, and proving it".
If a tip is ever alleged, the question is who inside the company held the information and who it was disclosed to. InsiderList keeps that as a record, holding the MNPI matter, the people with access, the acknowledgments they signed, and when each entry was made. The value is a map of who was inside a piece of information, captured as the matter developed, not assembled afterward when the conversations are hard to reconstruct.
See who held a piece of information, and who it reached, held as a contemporaneous record. Book a demo with our team.
InsiderList is insider trading compliance software used by companies in the UK, Europe, the USA and the UAE. This article is for general information and does not constitute legal advice. For advice on your situation, consult qualified US securities counsel.