The Boundaries For Insider Trading Prosecutions See A Resurgence: The 1980s Are Back!

In a closely followed appeal, the United States Court of Appeals for the Second Circuit on December 10, 2014, delivered an important decision in United States v. Newman1 by vacating the insider trading convictions of two former hedge fund portfolio managers, Todd Newman and Anthony Chiasson, and directing that the charges against them be dismissed with prejudice.

This decision has significant implications for criminal insider trading prosecutions and those brought civilly by the United States Securities and Exchange Commission (SEC). Fundamentally, it will make it more difficult for the government to charge alleged remote tippees (like the defendants in this case who were three or four persons removed from the corporate insiders) with violations of the federal securities laws. Indeed, the Court appeared to be critical of the government for bringing criminal insider trading charges against Newman and Chiasson at a point when neither corporate insider had been charged criminally for insider trading and one has also not been charged administratively or civilly.

This decision is significant because in it the Second Circuit:

Grounds its analysis in the United States Supreme Court's longstanding insider trading decisions of Dirks v. SEC2and Chiarella v. United States3 from the early 1980s, which established that "insider trading liability is based on breaches of fiduciary duty"; Clarifies the boundaries for tippee liability by holding that the government must prove beyond a reasonable doubt that a tippee has knowledge of the personal benefit to the tipper; and Restricts what constitutes a personal benefit in the context of insider trading by now requiring a quid pro quo relationship. According to the Second Circuit, the government's criminal case against Newman and Chiasson suffered from similar flaws that contributed to its loss in the criminal insider trading prosecution of Rengan Rajaratnam,4 as well as the SEC's losses in eleven insider trading cases or claims over the past year. As we pointed out last month in a BNA Securities Regulation & Law Report article,5 the SEC in all these cases stretched the law and/or the facts beyond fairness and reason. Like the judges and juries in those cases, the Second Circuit now appears to be setting the government straight.

Background

As part of a broader criminal insider trading investigation, the United States Attorney for the Southern District of New York, Preet Bharara (U.S. Attorney), brought insider trading charges against two hedge fund portfolio managers, Todd Newman (formerly at now-defunct Diamondback Capital Management, LLC) and Anthony Chiasson (formerly at now-defunct Level Global Investors, LP). At trial, the government provided evidence that Newman and Chiasson each traded shares of Dell and NVIDIA for their funds based upon...