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In a significant decision, the U.S. Court of Appeals in New York clarified that a person who receives insider information can only be prosecuted if they know that the source of the tip personally benefited from the disclosure.


In the case, insiders at Dell and NVIDIA secretly disclosed earnings data in advance of public announcements. After being passed through several people, this information eventually made its way to two hedge fund portfolio managers, who traded on it. The portfolio managers were prosecuted and convicted for insider trading.


On appeal, the federal appeals court threw out the convictions. It held that the Government was required to prove that, even if the hedge fund managers knew they had received insider information, they also knew that the source of the information had personally benefited from releasing the information. Since the Government could not show this knowledge, the convictions could not stand.


Although there are still significant civil penalties for insider trading, this decision limits the Government's ability to pursue criminal insider trading cases against downstream recipients of information.