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Let’s start with the basics. The legal prohibition against insider trading is not embodied in any specific statute. Instead, the ban is based on an interpretation of a broader ban on fraud under SEC Rule 10b-5. The classical theory of insider trading is that insiders violate Rule 10b-5 by using material, nonpublic information for personal gain in breach of their fiduciary duties.

People who don’t have fiduciary duties can engage in prohibited insider trading if they receive an illegal tip from someone who does have a duty. The basic idea here is to prevent insiders from getting around the law by giving insider information to co-conspirators not directly tied to the company in question.

Tipper-tippee liability has two important elements. First, there must be a disclosure of material, nonpublic information by someone with a fiduciary duty. Second, the person doing the disclosing—the tipper—must expect a personal benefit as a result of the disclosure. In effect, this means that accidental disclosures do not give rise to insider trading liability for either the tipper or the tippee.