Insider trading issues are again dominating the headlines. Insider trading violations occur when an individual in possession of material non-public information (a “tipper”) relays that information for personal gain (or in violation of a duty) to another person (a “tippee”), who trades on the basis of that information. One issue that frequently arises in such cases is whether an individual who receives such a tip has the requisite “scienter,” or state of mind, to have committed a violation.
Supreme Court cases discussing securities fraud and insider trading have appeared to use inconsistent, indeed conflicting, standards of scienter. In the case of Ernst & Ernst v. Hochfelder, the Supreme Court expressly stated that negligence could not satisfy the scienter standard. However, in the case of Dirks v. SEC, the court indicated that scienter could be satisfied by establishing not only what a tippee actually knew, but also what he or she should have known—a standard that sounds very close to the standard for negligence.