U.S. Court of Appeals Dismisses Insider Trading Case (with Bondi Comment)
The United States Court of Appeals for the Second Circuit (the "Court") reversed the convictions of two portfolio managers central to an investigation of illicit trading at hedge funds and networking firms and dismissed the indictment, as it pertained to the two managers, "with prejudice."
In United States v. Newman and Chiasson, the United States of America (the "Government") alleged that analysts at various advisers to hedge funds and investment firms obtained material, nonpublic information from employees of publicly traded technology companies and passed the information to the portfolio managers at their respective employers. The Government charged portfolio managers Todd Newman and Anthony Chiasson with willfully participating in this insider trading scheme by trading in securities on the illicitly obtained information.
On appeal, Newman and Chiasson challenged the sufficiency of the evidence relating to the offense, arguing that the United States District Court failed to instruct the jury that, in order to find them guilty, the tippee had to have known that the insider was receiving a personal benefit for disclosing the confidential information.
The Court agreed that the jury instruction was "erroneous," and held that, 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." Additionally, the Court agreed that the evidence was insufficient to sustain a guilty verdict against the portfolio managers, because the Government (i) offered insufficient evidence of personal benefit received by the alleged insiders and (ii) presented no evidence of Newman andChiasson's knowledge that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties.
Bondi Comment: The Second Circuit's decision undercuts a number of ongoing insider trading investigations, especially those in which the tippee is two or more levels removed from the alleged tipper. By requiring the government to prove that the tippee knew not only that the tipper breached a duty, but also that the tipper received a personal benefit, the Second Circuit has imposed a significant burden on proving these cases. Intuitively, it is easier for prosecutors to prove the knowledge of a breach, which is often evident from the circumstances, than knowledge of a personal benefit. This decision is a warning to prosecutors that they were overreaching in bringing charges.
See: U.S. Court of Appeals Decision. See generally: Insider Trading Specialty Page (available to Cabinet subscribers only). Related news: Second Circuit Expresses Skepticism toward Government's Theory of Insider Trading Cases against Downstream Tippees (with Avergun Comment) (April 22, 2014); Hedge Fund Managers Guilty of Insider Trading (December 20, 2012).