By Allison M. Vissichelli | 62 Am. U. L. Rev. 763 (2013)
On September 6, 2012, the U.S. Court of Appeals for the Second Circuit resurrected a $1.3 million enforcement action initiated by the U.S. Securities Exchange Commission (SEC) against, among others, Wynnefield Capital, Inc. founder Nelson Obus. Finding that the SEC provided sufficient evidence to create genuine issues of material fact as to whether Obus and the other defendants engaged in conduct amounting to insider trading in violation of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, the Second Circuit vacated the district court’s decision to grant summary judgment in favor of the defendants. However, the significance of the Second Circuit’s decision is not limited to its revival of the SEC’s complaint. Perhaps more importantly, the opinion offered a long-awaited resolution to the question of the degree of knowledge a tippee must have in order to satisfy insider trading’s scienter element. The Second Circuit opined that sufficient scienter exists when the “tippee knew or had reason to know that confidential information was initially obtained and transmitted improperly” and “the tippee intentionally or recklessly traded while in knowing possession of that information.” This Note argues that by adopting both a negligence and actual knowledge standard in SEC v. Obus, the Second Circuit failed to provide a practical resolution to the apparent tippee scienter conflict.