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 Lawyers for some defendants hinted they might seek to withdraw
guilty pleas, and a Manhattan federal judge questioned if four such
pleas were affected.
The moves were the latest repercussions from the 2nd U.S. Circuit
Court of Appeals finding that prosecutors presented insufficient
evidence to convict Todd Newman, a former portfolio manager at
Diamondback Capital Management, and Anthony Chiasson, co-founder of
Level Global Investors.
Speaking at a conference, U.S. Securities and Exchange Commission
Chair Mary Jo White said Thursday "there is no question it's a
significant decision," adding her agency was reviewing the Wednesday
ruling, which she called "overly narrow."
Some defendants who cooperated and pleaded guilty in the prosecution
of Newman and Chiasson are now considering taking the extraordinary
step of withdrawing their pleas, two lawyers said Thursday.
The three-judge panel not only found that prosecutors needed to
prove a trader knew that the original source of non-public
information has received a benefit in exchange for the tip, but also
narrowed what actually constituted such a benefit.
In several such cases, the defendants were tipped based on
information they received third- or fourth-hand, rather than
straight from the source, which made it tougher to prove their
awareness that source had obtained something tangible in return.
The ruling threatens to challenge a broad insider trading crackdown
underway since 2009 under Manhattan U.S. Attorney Preet Bharara,
whose office during his tenure has secured 82 other convictions.
'WORTH STUDYING'
While the pace of prosecutions had looked set to gradually slow from
the breakneck pace of recent years, the appeals court's ruling could
slam the brakes on authorities' efforts to pursue future cases.
Many on Wall Street say that despite Bharara's thrusts against the
practice, trading on privileged information remains common amid the
current M&A boom, with Merck & Co's acquisition of Cubist
Pharmaceuticals Inc just the latest deal to have seen unusual
options activity before being announced.
Among those threatening to withdraw plea deals is Danny Kuo, a
former Whittier Trust Co analyst who pleaded guilty in 2012 and
turned cooperator. Roland Riopelle, Kuo's lawyer, said in an
interview he had calls into the U.S. Attorney’s Office. While he had
not made a definite decision, the issue was "certainly worth
studying."
"If there's no crime there, that's a good reason to withdraw your
plea," he said.
Kuo was nearly sentenced to six months in prison in July by U.S.
District Judge Richard Sullivan, whose ruling in the Newman and
Chiasson case was subject to the appeal.
But Sullivan delayed sentencing, saying if the 2nd Circuit reversed
him and required proof a tippee knew an insider received something
for non-public information, he was "not sure, frankly, in the guilty
plea there's a sufficient basis to conclude that Mr. Kuo had that
knowledge."
The ruling may also benefit Michael Steinberg, a SAC Capital
portfolio manager convicted in 2013 and later sentenced to 3-1/2
years in prison as part of the same conspiracy.
Steinberg had raised similar arguments on appeal as Newman and
Chiasson, and his lawyer, Barry Berke, said Wednesday the ruling
meant his conviction would be vacated as well.
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Separately, U.S. District Judge Andrew Carter in Manhattan scheduled
hearings for Dec. 18 to address whether the ruling affects the pleas
of the four men, who admitted to engaging in a scheme to buy options
and stock in software maker SPSS Inc prior to the announcement that
IBM Corp was acquiring it.
The defendants include former Euro Pacific Capital Inc traders Daryl
Payton, Thomas Conradt and David Weishaus as well as Trent Martin, a
former analyst at Royal Bank of Scotland Group Plc.
The order came after prosecutors late Wednesday asked Carter to
suspend a pretrial schedule for a Jan. 12 trial of the last
remaining defendant in the case, saying the appellate ruling raised
"potential legal issues" that could affect the trial.
Lawyers for the defendants in the IBM case did not immediately
respond to requests for comment.
'BIG SHIFT'
Beyond pending cases, the ruling could also affect pending
investigations involving similar chains of tippees, said Glen Kopp,
a former prosecutor at Bracewell & Giuliani.
That would especially be true, he said, if authorities were sitting
on cases following oral arguments in the case in April, at which
some judges voiced skepticism of the prosecution's interpretation of
the law.
"Could it impact more cases? Absolutely," Kopp said.
As hedge fund managers and their lawyers digested Wednesday's news,
many began speculation about how the decision might impact their
industry in the weeks and months ahead, with one former prosecutor
who didn't want to be identified saying he thought it could lead to
firms seeking tips more aggressively.
“I think people will be conservative for a while to start,” he said,
adding that after a while, traders would likely start to make
on-the-spot decisions that fell into a riskier category. “I think
people will feel freer to send their analysts out to get information
and they’ll take more risks.”
(This story correct spelling of first name in 21st paragraph to Glen
from Glenn)
(Reporting by John McCrank, Nate Raymond, Emily Flitter, Svea Herbst
in New York, and Aruna Viswanatha in Washington, writing by Aruna
Viswanatha; Editing by Chizu Nomiyama and Christian Plumb)
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