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The Personal Benefit Test in Misappropriation Cases

By Jodi Misher Peikin and James R. Stovall

Like many aspects of insider trading law, the personal benefit test is deceptively straightforward. In tipping cases brought under the “classical” theory of insider trading, corporate insiders who disclose material nonpublic information, and persons who receive the information and trade based on it, are liable for securities fraud only if the tipper received a personal benefit in exchange for sharing the information. But almost 30 years after the test was first articulated, questions remain: Is the benefit test a separate element of liability or an aspect of another element, like breach of duty or scienter? And what counts as a sufficient “benefit”?

Those uncertainties have contributed to a greater controversy: whether the benefit test applies in tipping cases brought under the misappropriation theory. Prosecutors and regulators argue that it does not, and some courts have agreed. But careful examination of the purpose for the test and the requirements of misappropriation liability suggests that the government's opposition is misguided.

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