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WHITE-COLLAR CRIME | MONDAY, FEBRUARY 8, 2016 | S7

nitude of th[e] problem [was] needed” in priation theory. On that day, the Commis- trade on—such a practice is a common basis •••••••••••••••••••••••••••••

order to justify the bill.5
sion announced the settlement of an enforce- for insider trading liability. In U.S. v. New- 1. See U.S. Commodities Futures Trading Comm’n, “A Study of the Nature, Extent and Effects of Futures Trad-
In the wake of Dodd-Frank, proponents of ment action against a gasoline trader, Arya man, the Second Circuit clariied that there ing by Persons Possessing Material, Nonpublic Informa-
insider trading enforcement have won the Motazedi, whom it found had traded on is a higher bar to establish liability for such tion” at 54 n.10 (September 1984) (“[F]utures markets
debate. The CFTC, aiming to protect market information he misappropriated from his cases than the government had proposed have as a basic function facilitating risk shifting, certain
integrity, reversed course and demonstrated employer.11 According to the CFTC’s order, in its prosecution. In interpreting S.E.C. v. information cannot be equally accessible to all. Other-
a newfound enthusiasm for pursuing misap- as a trader for a company that traded gasoline Dirks—the Supreme Court case that dictates wise, a irm that is hedging its cash market risk would
propriation-based insider trading actions. For futures contracts, Motazedi both was privy that the initial tipper must have received a be disadvantaged in making those transactions, or, were
the irst time, Dodd-Frank made it unlawful for to material nonpublic information regarding “personal beneit” from tipping inside informa- its cash market operations or the full extent of its risk
any person, in connection with any contract his employer’s intention to trade those con-
tion before liability can attach to either that publicly disclosed, might have its ability to shift that risk impaired.”).
2. See Chiarella v. United States, 445 U.S. 222, 227
of sale of any commodity for future delivery, tipper or his tippees—the Second Circuit in (1980) (“[A] corporate insider must abstain from trading
to use or employ any manipulative or decep- Newman made clear that such a “personal in the shares of his corporation unless he has irst dis-
tive device or contrivance in contravention of beneit” is not so easily proven. The court closed all material inside information known to him.”).
Commission rules.6 Under that authority, the In the wake of Dodd-Frank, found that the reputational beneit that may 3. See 7 U.S.C. §13(c), (d) (2006).
Commission promulgated CFTC Rule 180.1, proponents of insider trading redound to a tipper from tipping inside infor- 4. See H.R. Rep. No. 6, 101st Cong., 2d Sess. 11 (1991).
which largely tracked the well-known secu- mation to a casual friend was insuficient to 5. H.R. Rep. No. 6, 101st Cong., 2d Sess. 59 (1991).
rities law provision, Rule 10b-5, in making it enforcement have won the satisfy the “personal beneit” requirement.13 6. 7 U.S.C. §9(1) (2012).
7. 17 C.F.R. §180.1 (2014).
unlawful to: “use or employ . any manipula- Rather, in order to meet this requirement, 8. Prohibition on the Employment, or Attempted Em-
debate. The CFTC, aiming to ployment, of Manipulative and Deceptive Devices and
tive device, scheme or artiice to defraud” or protect market integrity, re- the government must prove “a meaningfully Prohibition on Price Manipulation 76 F.R. 41398, 41403
“engage . in any act, practice, or course of close personal relationship that generates (July 14, 2011).
business, which operates or would operate versed course and demonstrat- an exchange that is objective, consequential, 9. Id. (emphasis added).
as a fraud or deceit upon any person.”7 In the and represents at least a potential gain of 10. Id. Dodd-Frank also provided a separate basis for
release adopting Rule 180.1, the Commission ed a newfound enthusiasm for a pecuniary or similarly valuable nature.”14
insider trading liability, which the former CFTC Chair-
sent the clear message that prosecuting trad- pursuing misappropriation- Although Newman was based on the clas- man referred to as the “Eddie Murphy Rule” in a refer- ence to the 1983 movie where an unpublished U.S. De-
ers using misappropriated material nonpublic sical theory of insider trading (i.e. where, by partment of Agriculture orange crop report was passed
information was not inconsistent with its core based insider trading actions.
sharing corporate information with others, tip- on to traders who attempted to proit from that informa-
mission of protecting the hedging opportuni- pers violate a duty to shareholders, rather than tion by trading frozen concentrated orange juice futures
contracts. See “First The Volcker Rule, Now The Eddie
ties provided by the derivatives markets. The tracts and owed his employer a duty not to to the source of their information), it is likely Murphy Rule!”, MarketBeat, The Wall Street Journal
Commission observed that the label “‘insider use the company’s proprietary information that Newman’s “personal beneit” requirement (March 4, 2010). The “Eddie Murphy Rule” prohibits all
trading’ can mean different things in differ- for his own beneit. Despite this duty, which applies to misappropriation-based insider federal employees from imparting non-public informa-
ent contexts,” and gave an explicit nod to was created by the company’s written pro- trading actions, such as those contemplated tion to assist others in a futures, options or swap trans- actions. 7 U.S.C. §6c(a)(4)(A)-(B).
key principles of CFTC-regulated markets: hibitions against personal trading, Motazedi under Regulation 180.1.15 Indeed, in interpret- 11. Order Instituting Proceedings, In re Arya Motaze-
“[U]nlike securities markets, derivatives mar- placed orders for gas and oil futures contracts ing Newman, Judges Rakoff and Carter of the di, CFTC Docket No. 16-02 (Dec. 2, 2015).
kets have long operated in a way that allows in his own personal accounts immediately Southern District of New York and one of the 12. U.S. v. Newman, 773 F.3d 438 (2d. Cir.), cert. den.,
for market participants to trade on the basis before placing orders for his employer. The SEC’s own Administrative Law Judges have 136 S.Ct. 242 (2015).
of lawfully obtained material nonpublic infor- CFTC found that Motazedi engaged in this all found that the opinion’s “personal beneit” 13. Newman, 773 F.3d at 452.
14. Id.
mation. [Rule 180.1] does not prohibit trading practice a dozen times in the hope that his holding applies to misappropriation cases.16
15. See U.S. v. O’Hagan, 521 U.S. 642, 652-54 (1997)
on the basis of material nonpublic information personal orders would beneit from any price The CFTC’s misappropriation theory for (misappropriation theory emanates from a iduciary’s “self serving use” of that information, involving con-
except as provided in the following paragraph movement that resulted from the subsequent insider trading liability will be “guided” by version of information “for personal gain”); S.E.C. v.
or otherwise prohibited by law.”8 The follow- execution of his employer’s orders. According the “substantial body of judicial precedent Obus, 693 F.3d 276, 289 (2d Cir. 2012) (tipper must have
ing paragraph of the release then spelled to the CFTC, Motazedi violated Rule 180.1, applying the comparable language of SEC Rule received a personal beneit from the tip to establish li-
out the theory: “Depending on the facts and marking the irst time the CFTC had used 10b-5.”17 Accordingly, the limits that Newman ability under the misappropriation theory); Newman,
circumstances, a person who engages in the Rule to enforce a misappropriation-based imposed on securities tipper-tippee liability 773 F.3d at 446 (“The elements of tipping liability are
deceptive or manipulative conduct in con- insider trading theory.
theories will presumably apply to the CFTC as the same, regardless of whether the tipper’s duty arises
under the ‘classical’ or the ‘misappropriation’ theory.”).
nection with any swap, or contract of sale of By bringing the Motazedi action, the CFTC well. Although Newman will not prevent the 16. See S.E.C. v. Payton, 14 Civ. 4644, slip op. at 9-10 (S.D.N.Y. April 6, 2015) (Rakoff, J.) (inding that, under
any commodity in interstate commerce, or has conirmed that it will use its new “insider CFTC from continuing to use its new author- Newman, the “personal beneit” requirement applied
contract for future delivery on or subject to trading” powers notwithstanding prior misgiv- ity to bring misappropriation-based insider to the misappropriation theory of insider trading in ad-
the rules of any registered entity, for example ings about pushing forth into insider trading trading cases against individuals like Motaze- dition to the classic theory); U.S. v. Conradt, et al., No.
by trading on the basis of material nonpublic enforcement. But what if the CFTC seeks to di, who directly trade on their employer’s 12-cr-887, slip op. at 3 (S.D.N.Y. Jan. 22, 2015) (Carter, J.)
information in breach of a pre-existing duty take the theory to the next logical step, to information for their own beneit, this new (same); In the Matter of Gregory T. Bolan, Jr. and Joseph
(established by another law or rule, or agree- charge tippers and tippees of misappropri- precedent will limit the CFTC’s ability to bring C. Ruggieri, File No. 3-16178, SEC Release No. 2309, at 1-2
ment, understanding, or some other source), or ated information? If the trader in Motazedi charges against tippers and tippees where, (Feb. 12, 2015). Moreover, at least one other circuit court
by trading on the basis of material nonpublic had tipped an investment adviser, or a swap like in Newman, the beneit to the tipper is has reached the same conclusion. See, e.g., SEC v. Yun,
327 F.3d 1263, 1275 (11th Cir. 2003) (“[M]ust prove that a misappropriator expected to beneit from the tip.”).
information that was obtained through fraud dealer, who then traded on that information, not so clear or easy to prove. To be sure, by 17. 76 F.R. at 41399.
or deception, may be in violation of inal Rule would the adviser or dealer be liable? If, as insisting that the equivalent of a quid-pro- 18. At least for the time being, Newman will be the
180.1.”9 The Commission emphasized that the we predict, the CFTC seeks to take the theory quo between the tipper and tippee be shown, primary case the CFTC must consider in bringing a tip-
Rule was consistent with its “responsibility to the next logical step, against tippers and the court in Newman imposed an evidentiary based insider trading case. However, the Supreme Court
to protect market participants and promote tippees of misappropriated information, it will burden that CFTC enforcement attorneys will recently granted a petition for certiorari in a criminal
market integrity” and with its view that the have to grapple with the latest shifts in insider have to carefully consider before bringing a insider trading action from the Ninth Circuit that also
Dodd-Frank anti-fraud provision “is a broad trading theory, particularly the Second Cir- misappropriation-based action against tip- turns on the scope and meaning of the “personal ben-
catch-all provision, reaching any manipula- cuit’s landmark decision in U.S. v. Newman.12
pees.18 Nonetheless, whatever the impact eit” requirement. See Salman v. U.S., ---S.Ct.---, 2016 WL 207256 (Mem) (Jan. 19, 2016). Depending on whether
tive or deceptive device or contrivance.”Although the CFTC’s action against Motaze- of Newman, the CFTC has staked out new and how the Supreme Court reformulates the standard,
10
this case could affect how the “personal beneit” ele-
On Dec. 2, 2015, the CFTC demonstrated di did not involve his “tipping”—i.e., providing ground as the derivatives market insider ment is analyzed in the future and should be closely
just how committed it is to the misappro-
material nonpublic information to others to
trading enforcer.
monitored by those interested in this issue.

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