Volume 58

Explaining Dirks

by Andrew N. Vollmer

The personal benefit element of the tipping violation established in Dirks v. SEC has been misunderstood. Courts, the SEC, and criminal prosecutors have broadly construed it to create liability for insiders who received remote, specula-tive, immaterial, or intangible returns after disclosing confidential company in-formation. Several situations, such as an insider’s gift of confidential information to a relative or friend or an intention to benefit the recipient of the information, do not require the insider to receive anything at all. 

The drafting history of the majority opinion in Dirks in the papers of its author Justice Lewis Powell reveals that the current wide interpretations of personal benefit in tipping cases are not consistent with the test the Court intended. The principal test of personal benefit was meant to be the insider’s receipt of cash or something of value within a short time. 

The special fact situations mentioned in Dirks, including a disclosure as a gift or with an intention to benefit, were not independent and sufficient grounds for finding that an insider received a personal benefit. Rather they were situations that often could create an inference of personal benefit. The drafting history and Justice Powell’s previous opinions show that Powell carefully used the word in-ference in the final opinion. He wanted proof of a fact situation to allow but not require a fact finder to conclude a tipper received a personal benefit. He did not intend proof of a fact situation to create a presumption or ultimate liability. 

Lessons from the drafting history show that the Supreme Court misapplied the gift situation in Salman. They also show that the Second Circuit’s Martoma deci-sion misinterpreted the intention to benefit language in the fact situations. 

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