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December 10, 2014

Second Circuit panel finds evidence insufficient to support two major insider trading convictions

There is big news in the white-collar crime (and sentencing?) world this morning coming out of New York thanks to the Second Circuit's significant new opinion in US v. Newman, No. 13‐1837 (2d Cir. Dec. 10, 2014) (available here).  This New York Times article about the ruling helps spotlight why this is Newman ruling is a very a big deal:

A federal appeals court on Wednesday overturned two of the government’s signature insider trading convictions, a stunning blow to prosecutors and their campaign to root out illegal activity on Wall Street.

In a 28-­page decision that could rewrite the course of insider trading law, sharply curtailing its boundaries, the United States Court of Appeals for the Second Circuit in Manhattan tossed out the case against two former hedge fund traders, Todd Newman and Anthony Chiasson. Citing the trial judge’s “erroneous” instruction to jurors, the court not only overturned the convictions but threw out the cases altogether....

The unanimous decision – the first higher court rebuke of an insider trading case filed by Preet Bharara, the United States attorney in Manhattan – could portend a broader revisiting of Mr. Bharara’s insider trading crackdown. It will also offer a blueprint for traders to defend future insider trading cases, a development that is likely to unnerve prosecutors while delighting the defense bar.

Here are a few paragraphs from the start of the Newman opinion:

Defendants‐appellants Todd Newman and Anthony Chiasson appeal from judgments of conviction entered on May 9, 2013, and May 14, 2013, respectively in the United States District Court for the Southern District of New York (Richard J. Sullivan, J.) following a six‐week jury trial on charges of securities fraud....

The Government alleged that a cohort of analysts at various hedge funds and investment firms obtained material, nonpublic information from employees of publicly traded technology companies, shared it amongst each other, and subsequently passed this information to the portfolio managers at their respective companies.    The Government charged Newman, a portfolio manager at Diamondback Capital Management, LLC (“Diamondback”), and Chiasson, a portfolio manager at Level Global Investors, L.P. (“Level Global”), with willfully participating in this insider trading scheme by trading in securities based on the inside information illicitly obtained by this group of analysts.   On appeal, Newman and Chiasson challenge the sufficiency of the evidence as to several elements of the offense, and further argue that the district court erred in failing to instruct the jury that it must find that a tippee knew that the insider disclosed confidential information in exchange for a personal benefit.  

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.  Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons.    First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive.    Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties. 

 Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.

Though this Newman opinion does not discuss formally sentencing issue, I cannot help but think that modern white-collar sentencing realities might be playing a role (perhaps a significant role) in the review and ultimate rejection of insider-trading convictions here. Both defendants appealing in this case were sentenced to a significant number of years in prison, and appellate judges are surely aware of how high the stakes now are for white-collar defendants subject to novel and aggressive prosecutorial practices.

December 10, 2014 at 11:34 AM | Permalink


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Good. I like to see that blowhard Bharara get a reproval.

Posted by: FluffyRoss | Dec 10, 2014 1:03:27 PM

"knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties."

Is that the actual standard??? It strikes me as a very stupid standard if that is true. Why should the standard depend on what party a knows about party b's knowledge of party c? Insider trading should only be about party a and party B, party c should be irrelevant.

Posted by: Daniel | Dec 10, 2014 3:42:55 PM

I am beginning to believe that "Justice" is being defined more and more as throwing crap against the wall by Prosecutors and seeing what "jurors" swallow on whether it sticks or not, aided and abetted mostly by former prosecutors, er I mean judges.

Posted by: albeed | Dec 10, 2014 5:14:10 PM

lol BINGO Albeed!

it also proves what I've said for years and years. Government agent are even lower than a used car salesman.

how can you tell they are lieing. Their mouths are moving!

Posted by: rodsmith | Dec 10, 2014 5:27:32 PM

Insider trading, even if it meets the criteria of the law, is not a crime. It is a false lawyer gotcha to extort money from productive males, and to stymie our economy. It is a sharp business practice, watched in newsletters, and used by traders to their advantage. The lawyer profession must be crushed if we are to have economic growth.

Posted by: Supremacy Claus | Dec 11, 2014 1:50:55 AM

"Insider Trading"..."sharp business practice"---and that's why Harvey Lappin, former BOP administrator, gets a pass for investing in Corrections Corporation of America--to which for-profit company he directed prison contracts, and is now selling his shares. Not "sharp," just a sharpie.

Posted by: FluffyRoss | Dec 11, 2014 7:28:03 AM

Fluff: People who sell believe the stock will drop in value. So if you owned CCA stock, wouldn't his selling his shares in it be a service to you, a benefit? Shouldn't you consider selling yours, since an insider is doing so?

Posted by: Supremacy Claus | Dec 11, 2014 8:39:31 AM

"...a stunning blow to prosecutors and their campaign to root out illegal activity on Wall Street."

This kind of pro-government framing in a "news" story would be bad enough, even in a story that didn't involve, as a matter of adjudicative fact, the government's securing an illegal conviction. I guess someone got wise, though: the language has been removed from the article.

Posted by: Michael Drake | Dec 11, 2014 2:06:48 PM

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