Tipper-Tippee Liability and Personal Benefit

Trading on a tip from someone inside a company isn't automatically illegal under US law — liability turns on a specific test set out by the Supreme Court in Dirks v. SEC. The person who leaked the information (the "tipper") must have breached a duty of trust by disclosing it for some personal benefit — money, a reputational favor, or even just the emotional reward of gifting an inside scoop to a friend or relative. The recipient (the "tippee") is then only liable if they knew, or should have known, that the tip came with that kind of breach attached.

This is why "I just heard it from a friend" isn't automatically a defense, but it also isn't automatically a crime — the analysis has to trace back to whether the original tipper got something out of the leak and whether the trader downstream was aware of that.

A worked example: an executive tells a golfing buddy about an unannounced merger purely to boost his own standing in their friendship circle, expecting nothing tangible in return. Courts have treated even this reputational or relationship-based reward as a "personal benefit" satisfying the tipper side of the test — so if the buddy trades knowing the tip was leaked improperly, both tipper and tippee can be liable, even though no money changed hands between them.