Martoma and Newman: Valid Corporate Purpose and the Personal Benefit Test

The law of insider trading in the United States is fundamentally grounded on a theory of property rights in information. Those to whom property rights in information have been allocated may trade without violating the prohibitions on trading contained in § 10(b) of the Securities Ex- change Act. Similarly, those who use material, nonpublic information for a valid corporate purpose have not violated the law. On the other hand, those who pilfer for personal gain material inside information belonging to a corporation do so at their legal peril. Those with property rights in inside information may authorize others to trade on the basis of that information as long as doing so is consistent with a valid corporate purpose.The personal benefit test should be viewed as a mechanism for determining when a tipper has acted with a valid corporate purpose or other legitimate objective when providing a tip. Approaching insider trading cases by focusing on whether a corporate insider/tipper had a valid corporate purpose for providing at tip harkens back to the important insight into SEC Rule 10b-5 made in SEC v. Texas Gulf Sulphur, which is that “the essence of the Rule is that anyone who, trading for his own account in the securities of a corporation has “access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal bene- fit of anyone” may not take “advantage of such information knowing it is unavailable to those with whom he is dealing.”1 By parity of reasoning, trading—and tipping—done in furtherance of a valid corporate purpose rather than in furtherance of a venal personal gain, should be permitted.