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White-Collar Crime | Monday, July 7, 2014 | S5

Our Forensic Accountants Leave

No Stone Unturned
advantage.” Thus, the test is whether the as to how this element will be applied in prac-

insider personally will benefit, directly or tice are likely to remain. most importantly,
indirectly, from his disclosure. Absent how particular must this knowledge be? And
some personal gain, there has been no consequently, to what extent will the require-
breach of duty to stockholders. And ment that the tippee have knowledge of the
absent a breach by the insider, there is tipper’s personal benefit actually constitute
no derivative breach.12
a meaningful issue for juries to consider in
Justice Lewis f. powell Jr. went on to write insider trading cases?
for the court that analyzing whether there has As discussed above, the Supreme Court in
been such a breach “requires courts to focus Dirks held that a tipper could benefit through

on objective criteria, i.e., whether the insider either pecuniary or reputational gain. But sig-
receives a direct or indirect personal benefit nificantly, the court also observed that the
from the disclosure, such as a pecuniary gain benefit could be proven from circumstan-
or a reputational benefit that will translate tial evidence arising from the relationship
into future earnings.”13 Applying this rule, the between tipper and tippee “that suggests a
court held that there had been no breach quid pro quo from the latter, or an intention
in Dirks because “[t]he tippers received no to benefit the particular recipient. The ele-
monetary or personal benefit for revealing ments of fiduciary duty and exploitation of
[the corporation’s] secrets, nor was their nonpublic information also exist when an Unfortunately, fraud can happen anywhere, and no one is immune. White collar crime
continues to endanger businesses, and technology eases the way for perpetrators to cover
purpose to make a gift of valuable informa- insider makes a gift of confidential informa-
tion” to the tippee.14
tion to a trading relative or friend.”16 As a their tracks. That’s why an accountant should be an integral part of your team. Leaving no
while Newman and Chiasson argue that result, the Second Circuit observed in Obus stone unturned, our forensic accountants have the technical expertise necessary to analyze
Dirks strongly suggests that the tipper’s that “[i]n light of the broad definition of per- books and records, detect inconsistencies, and find and trace hidden or misappropriated
personal benefit is what creates the breach, sonal benefit set forth in Dirks, this bar is not assets. Isn’t it time you made Israeloff, Trattner & Co. part of your team?
the government takes the opposite position, a high one.”17
relying upon the Second Circuit’s opinion in The question, then, is how high the bar FORENSIC ACCOUNTING • EXPERT TESTIMONY • EMbEzzLEMENT & FRAUd AUdITS
Obus, which interpreted Dirks. There, the should be for knowledge of this benefit by bUSINESS LOSS • dAMAGE ANALYSIS
PERSONAL INJURY, WRONGFUL dEATH OR TERMINATION
court held:
the tippee. in Whitman, where the court did
[T]ipper liability requires that (1) the require such knowledge, rakoff appeared to MARITAL dISSOLUTION • bANKRUPTCY
tipper had a duty to keep material non- lower the bar even further, ruling that “there is bUSINESS, PROFESSIONAL PRACTICE & LICENSE vALUATIONS
public information confidential; (2) the no reason to require that the tippee know the
tipper breached that duty by intention- details of the benefit provided; it is sufficient
ally or recklessly relaying the information if he understands that some benefit, however Offices in New York City and Garden City
to a tippee who could use the information modest, is being provided in return for the 1-8OO-945-O2OO
information.”18 Accordingly, rakoff charged
in connection with securities trading; and the jury that it was not necessary that the Visit us on the web at www.israeloff.com
(3) the tipper received a personal benefit
from the tip. Tippee liability requires that defendant understand “the specific benefit IT13_NYLJ_ForensicAcctg_4.75x5.5_final.indd 1
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(1) the tipper breached a duty by tipping given or anticipated by the insider in return
confidential information; (2) the tippee for disclosure of inside information; rather,
knew or had reason to know that the tip- it [was] sufficient that the defendant had a
pee improperly obtained the information general understanding that the insider was
(i.e., that the information was obtained improperly disclosing inside information for
through the tipper’s breach); and (3) the personal benefit.”19
But this instruction raises the question of
tippee, while in knowing possession of
the material non-public information, used just how vague the tippee’s understanding
the information by trading or by tipping of the benefit can be. for example, can the
for his own benefit.15
tippee have a general understanding that the
tipper benefited but be factually wrong as to
Thus, while the court never explicitly held the type of benefit received? for instance,
that a tippee need not have knowledge of would the knowledge requirement be satis-
the tipper’s personal benefit to be liable, the fied if the tippee genuinely believed that the
government’s position relies on the fact that tipper was paid money in exchange for the
Obus: (a) defined the elements of tipper liabil- tip, but it turned out that the tipper’s benefit

ity in a manner that appeared to separate the was merely reputational? Dirks makes clear
tipper’s personal benefit from the breach; and that at least where there is no improper
(b) stated a requirement that the tippee have purpose—for example, when the tipper’s
knowledge of the tipper’s breach to establish purpose is to expose fraud—it is legally
tippee liability, but omitted any requirement impossible for a tippee to have such knowl-
of knowledge of the tipper’s personal benefit.
edge. if, however, the tipper’s purpose was
Accordingly, as the court in Newman con- improper, and the tippee was simply mistaken
siders whether knowledge of the tipper’s as to precisely why, it is unclear whether this
personal benefit is required to prove the would constitute an understanding of “some

guilt of the tippee, the question will likely benefit.”
come down to the relationship between the in addition, courts will have to consider
tipper’s derivation of a personal benefit and how much evidence will suffice to show tip-
the breach of fiduciary duty: is tipping for pee knowledge of the tipper’s benefit. with
personal benefit itself the breach of fiduciary respect to the tippee’s knowledge of a breach
duty, as the defendants argue, or is it rather of fiduciary duty, the Second Circuit has held
a separate element of the offense altogether, that the standard is merely whether the tip-
as the government contends?
pee knew or should have known about the

breach,20 a finding that can be made based
Practical Implications of ‘Newman’
on circumstantial evidence.21 if the same
standard is applied to the question of knowl-
if the Second Circuit rules in Newman that edge of the tipper’s benefit, one can only
knowledge of the tipper’s benefit is required wonder whether this additional knowledge
to support the tippee’s conviction, questions
requirement would pose any » Page S11