What Is Tipper-Tippee Liability?

Insights from a Federal Securities Fraud Defense Lawyer

Tipper-tippee liability is a legal theory prosecutors use to convict individuals who trade on insider information even when they aren’t corporate insiders. If you’re being investigated for securities fraud and don’t understand how you could be liable as a tippee, you need to know that federal prison time, asset forfeiture, and career destruction are on the line—even if you received a tip for free.

The SEC and DOJ are obtaining multi-year prison sentences for tippees even when the original tipper is acquitted. This means you can be found guilty of insider trading even if the person who allegedly tipped you is found not guilty in the same trial. The government is using tipper-tippee liability to destroy the myth that you need to be inside a company to be convicted of securities fraud.

I’m Todd Spodek, a nationally recognized federal defense attorney with decades of experience handling complex securities fraud cases. I’ve seen firsthand how prosecutors leverage the tipper-tippee doctrine to convict individuals who never thought they were doing anything wrong. The SEC and DOJ are aggressively pursuing tipper-tippee cases, and they’re not letting go even after the Supreme Court’s decisions in Dirks and Salman.

If you’re under investigation or have received a subpoena, you need to understand the true risks of tipper-tippee liability. It’s not just about whether you were an insider—it’s about whether you traded on information you knew, or should have known, was improperly disclosed.

Who Is Considered a Tipper and a Tippee?

Tipper

A tipper is someone who has access to material nonpublic information (MNPI) about a company and discloses that information to someone else—often a friend, family member, or business associate—without a legitimate business reason. The tipper usually breaches a duty of trust or confidence owed to the company or its shareholders.

Tippee

A tippee is the person who receives the MNPI from the tipper. Even though the tippee may not have any direct connection to the company, they can be held liable for insider trading if they trade on the information or pass it along to others.

The Legal Foundation: Dirks v. SEC

The legal foundation for tipper-tippee liability comes from the Supreme Court’s decision in Dirks v. SEC. In Dirks, the court established that tippees can be held liable if:

• The tipper breached a fiduciary duty or similar duty of trust and confidence by disclosing the information.
• The tippee knew or should have known about the tipper’s breach.
• The tipper received a personal benefit from disclosing the information.

This standard means that the tippee’s liability flows from the tipper’s breach. However, the courts have interpreted the “personal benefit” requirement broadly, making it easier for prosecutors to prove.

How Tipper-Tippee Liability Works

A “Gift” of Information

The Supreme Court has held that a tipper can receive a personal benefit even if they don’t receive money or tangible compensation. Simply providing a gift of confidential information to a trading friend or relative can be enough to establish a breach.

Tippee’s Knowledge

The tippee doesn’t have to know every detail of the tipper’s breach. If the circumstances suggest that the information was improperly obtained, the tippee is expected to investigate further before trading. Ignoring red flags can lead to liability.

Derivative Liability

Tippee liability is derivative—meaning it depends on the tipper’s breach. However, prosecutors can indict the tippee even if the tipper hasn’t been charged or convicted. The tippee’s fate isn’t always tied to the tipper’s outcome.

The Evolution of Tipper-Tippee Liability

The concept of tipper-tippee liability has evolved significantly over the years. Initially, the courts focused on the tipper’s intent and whether they received a direct personal benefit. However, recent cases have expanded the definition of “personal benefit” to include indirect or intangible gains, such as enhancing a personal relationship or future business opportunities.

This expansion has made it easier for prosecutors to prove tipper-tippee liability, especially in cases where the tipper and tippee have a close personal or professional relationship. The courts have also emphasized the tippee’s responsibility to investigate the source of the information and avoid trading if there are any red flags.

Examples of Tipper-Tippee Scenarios

• Classic Insider Trading: Corporate insiders such as executives, board members, or employees disclose material nonpublic information to friends or family members, who then trade on that information.

• Misappropriation of Information: Individuals who misappropriate confidential information from their employers or other sources and disclose it to third parties are considered tippers. The third parties who trade on that information are considered tippees.

• Trading on Tips from Analysts, Consultants, or Industry Insiders: Analysts, consultants, or industry insiders who have access to material nonpublic information may disclose that information to clients or friends, who then trade on it.

• Trading on Tips Received from Journalists or Other Media Sources: Journalists or other media sources who have access to material nonpublic information may disclose that information to others, who then trade on it. If the tippee knows or should have known that the information was obtained improperly, they can be held liable.

• Trading on Rumors or Speculation: Even if the tippee didn’t receive the information directly from an insider, they can still be held liable if they traded on a tip that they knew or should have known was based on material nonpublic information.

Recent Developments in Tipper-Tippee Liability

Salman v. United States

In Salman v. United States, the Supreme Court addressed whether a tipper needed to receive something of pecuniary value to incur liability. The court held that a gift of information to a trading friend or relative satisfies the personal benefit requirement, even if no money changes hands.

United States v. Martoma

In United States v. Martoma, the Second Circuit expanded the definition of personal benefit even further, holding that the expectation of future pecuniary gain or professional benefit can satisfy the requirement.

The Risks of Tipper-Tippee Liability

Criminal Penalties

Convictions for insider trading can result in significant prison sentences—even for tippees. The SEC and DOJ are seeking multi-year sentences for tippees who trade on inside information.

Civil Penalties

The SEC can obtain civil penalties, injunctions, and asset freezes in tipper-tippee cases. Tippees may be required to disgorge profits and pay significant fines.

Career Consequences

Even if you avoid jail time, a tipper-tippee conviction can end your career. FINRA bars, SEC prohibitions, and loss of professional licenses can destroy your livelihood.

How to Protect Yourself

• Don’t Trade on Unverified Tips: If you receive information that sounds too good to be true, it probably is. Avoid trading on tips that you cannot independently verify.
• Investigate the Source of the Information: If you receive information from someone, ask questions about where they got it. If the information is material and nonpublic, you may be better off not trading.
• Consult with an Experienced Securities Fraud Defense Attorney: If you are under investigation or have been charged with insider trading, it is critical to consult with an experienced federal defense attorney. An attorney can help you understand the risks and develop a strategy to protect yourself.

Spodek Law Group’s Approach to Tipper-Tippee Liability

At Spodek Law Group, we have extensive experience defending individuals and companies against insider trading charges, including tipper-tippee liability. Our legal team of former federal prosecutors and experienced defense attorneys understands the complexities of these cases and can develop a tailored defense strategy.

We work closely with our clients to understand the unique facts and circumstances of their case and develop a comprehensive defense strategy. Our goal is to achieve the best possible outcome, whether that means negotiating a favorable settlement, obtaining a dismissal, or going to trial.

The Bottom Line

Tipper-tippee liability is a complex and evolving area of law. If you are under investigation or have been charged with insider trading, it is critical to understand the risks and develop a comprehensive defense strategy. An experienced federal defense attorney can help you navigate the complexities of these cases and protect your rights.

If you have any questions about tipper-tippee liability or need to speak with an experienced securities fraud defense attorney, please contact us at Spodek Law Group for a confidential consultation.

Contact Spodek Law Group today at 908-643-7005 to schedule a confidential consultation regarding tipper-tippee liability and your legal options.