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 The question facing the 2nd U.S. Circuit Court of Appeals in New
York on Tuesday is one that has divided lower court judges: whether
to be convicted of insider trading, the recipient of non-public
information must know that the source of the tip benefited from the
disclosure.
The issue is at the heart of the appeal brought by Todd Newman, a
former portfolio manager at the hedge fund Diamondback Capital
Management, and Anthony Chiasson, co-founder of the hedge fund Level
Global Investors.
Newman and Chiasson were convicted in 2012 for their roles in a
scheme prosecutors said reaped $72 million in illicit profits after
trading on inside information about Dell Inc and Nvidia Corp.
The government said Newman, 46, and Chiasson, 49, traded on tips
they received from analysts who worked at their hedge funds.
These analysts, the government said, were part of a "corrupt circle"
of investment firm analysts that traded non-public information
obtained from insiders at various companies, including Dell and
Nvidia.
Newman has been sentenced to 4-1/2 years in prison, and Chiasson
faces a 6-1/2 year term. Both men have been free on bail pending
their appeal.
A ruling reversing Newman and Chiasson's convictions would mark a
significant setback for Manhattan U.S. Attorney Preet Bharara, whose
office has secured insider trading convictions of 80 individuals
since October 2009.
PERSONAL BENEFITS
The U.S. Supreme Court in 1983 held that a "tippee" can only be
found to have engaged in insider trading if the tipper benefited
from the disclosure.
The issue the 2nd Circuit is being asked to address is whether
prosecutors must show the tippee knew of the tipper's benefit, which
can be financial or non-monetary.
"It's a significant question both in terms of giving guidance to the
business community and in terms of whether prosecutors are trying to
stretch the securities laws too far," said John Buretta, a lawyer at
Cravath, Swaine & Moore who is not involved in the case.
At Newman and Chiasson's 2012 trial, U.S. District Judge Richard
Sullivan in Manhattan declined their lawyers' request to instruct
the jury that for the men to be found guilty, prosecutors needed to
prove they knew the insiders benefited.
He gave a similar instruction in the case of Michael Steinberg, a
SAC Capital portfolio manager convicted in December in a case that
involved the same alleged "corrupt circle" of analysts.
OPPOSITE CONCLUSION
Newman and Chiasson's lawyers contend that Sullivan misconstrued the
law. In appellate briefs, the lawyers cite rulings in which four
other judges from Manhattan federal court came to the opposite
conclusion from Sullivan.
Defendants in those cases include Galleon Group hedge fund founder
Raj Rajaratnam, SAC Capital portfolio manager Mathew Martoma, and
California hedge fund manager Doug Whitman.
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Stephen Fishbein, a lawyer for Newman, told the 2nd Circuit during
arguments over bail in June that whether his client faces jail
"should not depend on what judge we drew and where that judge comes
down on a hotly debated issue that the courts haven't decided."
In the Whitman case, for example, U.S. District Judge Jed Rakoff in
2012 said prosecutors must show the tippee knew the tipster
benefited from the disclosure, rejecting the government's arguments
that requiring such proof could allow insider traders to avoid
prosecution.
Rakoff wrote that while it may be an "unfortunate 'loophole,' it is
a product of the topsy-turvy way the law of insider trading has
developed in the courts and cannot be cured short of legislation."
The 2nd Circuit upheld Whitman's conviction in February. Newman and
Chiasson have seized on language in that ruling, which said the
appeals court had not yet ruled on whether a tippee must have
knowledge of the benefit.
Lawyers for Newman and Chiasson declined comment, as did a
spokeswoman for Bharara.
RIPPLE EFFECTS
Should Newman and Chiasson win a new trial or acquittal, the ruling
could have ripple effects.
Steinberg's lawyers would likely rely on such a ruling to argue that
his conviction should be overturned.
Barry Berke, a lawyer for Steinberg, declined comment. But early on
he had objected to Steinberg's case being assigned to Sullivan,
saying last year that he was concerned the government sought to put
the case before him "because of that legal issue that is obviously
hotly disputed."
Meanwhile, lawyers for Rengan Rajaratnam, the younger brother of Raj
Rajaratnam who was charged with insider trading in March 2013, have
cited the Newman and Chiasson case in arguing the government failed
to allege Rajaratnam knew two alleged tippers received personal
benefits.
U.S. District Judge Naomi Reice Buchwald on Friday rejected
Rajaratnam's bid to dismiss the indictment against him for lack of
allegations he knew the insiders benefited. But she acknowledged she
would need to address before trial what the jury needed to find
regarding knowledge of the benefits.
Daniel Gitner, Rajaratnam's lawyer, did not respond to requests for
comment. Trial in Rajaratnam's case is scheduled for June 17.
The case is U.S. v. Newman, 2nd U.S. Circuit Court of Appeals, No.
13-1837.
(Reporting by Nate Raymond in New York;
editing by Noeleen Walder, Amy Stevens, Chizu Nomiyama and Gunna Dickson)
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