Securities Regulation: United States v. Newman, 773 F.3d 438 (2d Cir. 2014)

Review the summary of United States v. Newman, 773 F.3d 438 (2d Cir. 2014) Assume Ken Hastings (cookout host) and Tim Daniels (Ken’s tennis partner) both bought stock in New World Industries as soon as the market opened on Monday and all profited 30% after the press announcement by Mrs. Chen. Pursuant to their agreement, Tim Daniels paid Ken Hasting 5% of the profit he made on the transaction. With regard to Judith Chen, Steve Chen, Ken Hastings and Tim Daniels, which of these parties could be considered an “insider” under rule 10(b)(5) of the Securities Act of 1934? Explain why or why not. Which of these parties could have tipper or tippee liability in this case? Did Judith Chen’s actions in telling her husband about the settlement breach her fiduciary duty? Who actually obtained a personal benefit from the tip and how? Include one peer reviewed source

Securities Regulation: United States v. Newman, 773 F.3d 438 (2d Cir. 2014)

Q1. With regard to Judith Chen, Steve Chen, Ken Hastings and Tim Daniels, which of these parties could be considered an “insider” under rule 10(b)(5) of the Securities Act of 1934? Explain why or why not.

Judith Chen would be an insider. Under rule 10(b)(5) of the Securities Act of 1934, an insider can be an individual entrusted with confidential information by a company for corporate purposes and is expected to keep that information confidential (Karmel, 2015). Judith Chen is entrusted with confidential corporate information and the entity has a proper purpose of maintaining confidentiality. Steve, Ken, and Tim would not be considered insiders because they were not entrusted with any confidential information by the corporation.

Q2. Which of these parties could have tipper or tippee liability in this case?

Ken Hastings has both tipper and tippee liability. SEC requires two conditions for a tippee to be held liable; the tippee breached a duty to the company or the source of information, and the tippee had to pay some “personal benefit” to the tipper. The tipper must have illegally tipped to be held liable. Even though Judith Chen entrusted her husband, Steven Chen, with private corporate information, there is no indication that the two parties intended to trade on this information. Ken Hastings, however, received the tip from Steven Chen, which means he had a fiduciary duty. He then shared the information with Tim Daniels for a profit of %% of the returns. These actions make Ken Hastings liable for both tipper and tippee liability. Tim Daniels did not have any reason to believe that Ken Hastings had any fiduciary duty to the corporation, so he has no tippee liability.

Q3. Did Judith Chen’s actions in telling her husband about the settlement breach her fiduciary duty?

No, Judith Chen did not breach her fiduciary duty by giving her husband the information because none of them intended to use the information for personal benefit.

Q4. Who actually obtained a personal benefit from the tip and how?

Ken Hastings and Tim Daniels obtained a personal benefit. New World Industries’ stock went up 30% after both had invested their money, hence gaining the profits. Ken Hastings gained from the entire portfolio he had invested in the stock and also from the 5% he received from Tim Daniels in exchange for the tip.

References

Karmel, R. S. (2015). The law on insider trading lacks needed definition. SMUL Rev., 68, 757.