A defendant in an insider trading case who allegedly profited from his inside knowledge recently filed a motion to dismiss in the US District Court for the District of Rhode Island to drop him from a Securities and Exchange Commission suit. The defendant tippee, Kenneth Rampino, claimed that following the recent holding in U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014), the SEC unsuccessfully satisfied the requirement that it show the alleged tipper benefited in exchange for his alleged tip to Mr. Rampino, or that Mr. Rampino knew of any such benefit.

The SEC’s complaint claims that the insider, Anthony Andrade, tipped Mr. Rampino with material, non-public information concerning the potential acquisition of Bancorp RI, the company at which Andrade was on the board of directors. According to the SEC, Mr. Rampino knew that Mr. Andrade had no legitimate business purpose in providing him with that information and that Mr. Rampino was breaching his fiduciary duty. The SEC further alleges that during the course of their 20-year friendship, Mr. Rampino and Mr. Andrade exchanged things of value for the other’s personal benefit. As examples, the SEC cites potential free legal advice provided by Mr. Rampino to Mr. Andrade and home improvement services provided by Mr. Andrade to Mr. Rampino. Under these facts, the SEC brought claims against the pair that they had violated Section 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934.

In fighting these allegations, Mr. Rampino claims that the SEC complaint does not include any allegations that Mr. Andrade received a personal benefit in exchange for the tip or that Mr. Rampino knew or should have known that Mr. Andrade received such a benefit, requirements under the Newman standard. The US Supreme Court case of Dirks v. S.E.C., 463 U.S. 646 (1983) establishes the standard in insider trading cases as “whether the insider personally will benefit, directly or indirectly from his disclosure. Absent some personal gain, there has been no breach of duty.” Newman further established that the government must prove that the tippee, here Mr. Andrade, must know that the insider tipped for his or her personal benefit. This is yet another case among many attacking the government’s insider trading allegations based on Newman, cited as one of the most significant developments in insider trading law in a generation.