By Elena Eyber, J.D.
The Supreme Court denied certiorari for a petition asking it to review the judgment of the Seventh Circuit regarding remote tippee liability. The petitioner who was convicted of conspiring to commit insider trading as a remote tippee of an insider petitioned the Court to resolve two questions when determining tippee liability under Dirks and Salman: (1) what level of knowledge a remote tippee must have of the personal benefit to the insider to have participated in the insider’s breach, especially where, as in this case, the insider received money in exchange for disclosure, but also claimed he intended to benefit a friend; and (2) how to determine the scope of a conspiracy when a remote tippee is far removed from the insider and does not participate in, or have knowledge of, the conspiracy’s profit sharing agreement (Weller v. U.S., November 14, 2022).
Insider trading. Weller was convicted of conspiring to commit insider trading as a remote tippee of insider Shane Fleming, a vice president of Life Time Fitness, Inc. In his capacity as vice president, Fleming learned that the company was likely to be acquired by private equity firms, and that the price of LTF’s stock would increase to at least $65 per share. Fleming had a fiduciary duty to LTF to maintain the confidentiality of this material nonpublic information and not to disclose it to others. Fleming disclosed the information to his friend and business partner, Bret Beshey, knowing that Beshey would use the information to purchase and sell securities. Beshey agreed to pay Fleming a share of the profits that he earned as a result. Beshey then provided the information to Chasity Clark, his girlfriend, and Peter Kourtis, his friend and business partner. Kourtis provided the information to Weller, who is a remote tippee, multiple levels removed from the insider. Weller ultimately purchased out-of-the-money call options, earning more than $550,000. Weller did not pay Kourtis a share of his profits, but he did give Kourtis $20,000 of marijuana.
Seventh Circuit decision. On appeal to the Seventh Circuit, Weller argued that his case should not have proceeded to trial because the indictment failed to allege an essential element of the offense that Weller knew that the insider received a personal benefit in exchange of the disclosure of material nonpublic information in breach of his fiduciary duty. Further, he argued that the evidence was insufficient to establish that he knew of the personal benefit, and thus, was insufficient to prove he had the requisite knowledge to join the conspiracy. Weller argued that the allegation and evidence that Weller had knowledge that a friendship existed between Fleming and Beshey was insufficient to allege or prove his knowledge that Fleming had disclosed the information to his friend as a gift, thereby personally benefitting himself, in breach of his fiduciary duty. Thus, without knowing that Fleming had sold the information for money, it was not illegal for Weller to trade on that information. Further, he argued he could not have knowingly joined in the single conspiracy alleged in the indictment where his connection to the other members was so attenuated, as the Second Circuit held in Geibel.
The Seventh Circuit affirmed the decision of the district court, upholding the denial of Weller’s motion to dismiss because the indictment alleged that Beshey was Fleming’s friend, and that Fleming violated a duty to this employer. The Court held that given Salman and Dirks, these allegations were sufficient to allege that Fleming received a personal benefit. The Seventh Circuit found that the evidence was sufficient, despite Weller’s lack of knowledge beyond the existence of a friendship, because there is no requirement to prove that a monetary benefit was received by the insider. The Seventh Circuit found that while the insider would be entitled to acquittal had he been charged with conspiring with Weller, the same was not true of Weller where he was charged with conspiring with the insider. The Seventh Circuit explained that even if Weller had only participated in a narrower conspiracy, he had not been prejudiced because no matter what else one makes of the evidence, Weller and Kourtis conspired to misuse material nonpublic information.
Personal benefit and knowledge requirements. Weller argued that the personal benefit and knowledge elements for insider trading liability merit this Court’s review, and that this Court should reexamine the limits of the personal benefit test for insider trading liability and its connection to the requisite knowledge that a remote tippee must have to knowingly conspire. Weller argued that these elements have been broadened by the lower courts so significantly since they were established in Dirks that they no longer serve the limiting purpose for which they were intended, and instead now function as a general duty on all market participants, in stark contrast to this Court’s prior rulings.
Weller argued that the Seventh Circuit’s opinion further weakens the personal benefit requirement by allowing for dual and contradictory motivations when the Seventh Circuit held that alleging and proving that a friendship exists between the insider and tippee is sufficient on its own to demonstrate that the insider received a personal benefit, even where the insider received money from the same tippee in exchange for disclosure. In addition to broadening the personal benefit test, Weller argued that the Seventh Circuit’s opinion conflicts with this Court’s precedent in Dirks and Salman by requiring mere knowledge that a friendship existed between the insider and the first tippee to prove Weller’s knowledge that the insider breached his fiduciary duty by disclosing in exchange for a personal benefit.
Further, Weller argued that the petition should be granted because this case provides a vehicle to strengthen the personal benefit and knowledge requirements to convict a remote tippee of conspiring to commit insider trading. Weller argued that while this Court previously held that a friendship may justify an inference that the insider personally benefited from disclosing as a gift, the Seventh Circuit now held that the existence of a friendship establishes both the personal benefit to the insider and the knowledge of the remote tippee, even where a personal benefit was pecuniary. The Court should reject this rule, which expands liability to anyone who knowingly trades on insider information.
Conflict with the Second Circuit’s opinion in Geibel. Lastly, Weller argued that the Court should grant the petition because the Seventh Circuit’s ruling in this case conflicts with the Second Circuit’s ruling in Geibel. Specifically, while the Second Circuit held that a remote tippee may seek acquittal where the remote tippee participated in only a narrower conspiracy and was prejudiced by the variance, the Seventh Circuit now held that such grounds for acquittal are limited to the insider accused of conspiring with a remote tippee.
The petition is No. 22-0330.