Tipper Gored

United States v. Gansman, No. 10–0731-cr (2d Cir. September 9, 2011) (Cabranes, Chin, CJJ, Keenan, DJ)

From 2005 to 2007, James Gansman, an attorney at Ernst and Young, was having an affair with one Donna Murdoch. Perhaps as part of their “pillow talk,” Gansman – the “tipper” – would pass Murdoch material, non-public information, on which Murdoch – the “tippee” – traded profitably. Gansman was ultimately prosecuted for securities fraud under the “misappropriation” theory – as described by the Supreme Court, this occurs when a defendant misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.Liability can attach even if the defendant does not trade on it himself.

Gansman, whose defense was that he did not intend to commit securities fraud, sought a jury instruction under SEC Rule 10b5-2, asking the court to instruct that Gansman shared information with Murdoch as part of a relationship of trust and confidence in which they had a pattern of sharing personal confidences – the aforementioned “pillow talk” – such that Gansman reasonably expected that Murdoch would keep the confidences to herself and not trade on them.

The district court gave a version of the charge that was only slightly different in wording contained in Gansman’s request. The court instructed that Gansman contended that he did not provide Murdoch with insider information with the understanding that she would use it to buy and sell securities, because he shared the information with her as part of a relationship in which they shared work and personal confidences.

Both sides took issue with this in the circuit. Gansman complained that the district court should have used his own wording, but the circuit held that the charge adequately conveyed his theory of defense – many facts in the record contradicted that theory, however – and that the charge was not error.

More importantly, the court rejected the government’s argument that the charge should not have been given at all. In prosecuting a “tipper” under the misappropriation theory of insider trading, the government must prove as an element of the offense that the tipper conveyed material non-public information to his “tippee” with the understanding that it would be used for securities trading. Otherwise, at least where the tippee owes a duty of trust or confidence to the tipper, and the tipper conveys confidential information without intending that the tippee trade on it, only the tippee is liable on a misappropriation theory. And here, it was “perfectly appropriate” for Gansman to defend against the charge by arguing that his relationship with Murdoch exemplified those circumstances. Indeed, there have been cases where a tipper was not liable even though the tippee was. If the jury here had agreed with this theory – it did not, of course, – Gansman would have been acquitted.