In a case closely watched by the white collar defense community, a U.S. appeals court has overturned the convictions of two former hedge managers who were believed to have been guilty of insider trading of technology stocks.
Insufficient Evidence to Convict for Insider Trading
The 2nd U.S. Circuit Court of Appeals in New York ruled prosecutors in the case had presented insufficient evidence to convict Todd Newman and Anthony Chiasson. Newman is a former portfolio manager at Diamondback Capital Management and Anthony Chiasson is a co-founder of Level Global Investors.
In a blow against federal prosecutors and Manhattan U.S. Attorney Preet Bharara’s crackdown on insider trading, the court held that defendants can only be convicted on insider trading charges of the person trading on the information knew the original tip-giver had disclosed the information in exchange for personal benefit.
Alleged Insider Trading
On 2012, Newman, 50, and Chiasson, 41, were found guilty for trading on insider information about computer maker Dell Inc and chipmaker Nvidia Corp, a scheme that according to the government reaped $72 million in illicit profits. Prosecutors alleged both men had traded on inside tips they had receive from analysts who were members of a “corrupt circle” that traded non-public information they had obtained via employees at various companies.
Newman was sentenced to 4-and-a-half years in prison, Chiasson to 6-and-a-half years. The two were out on bail pending appeal.
The case was closely watched by those in the white collar defense community to see if the court would set a new standard for providing proof in insider trading cases.
Jill Fisch, a professor at the University of Pennsylvania School of Law, felt the ruling sent a message that the recent insider trading prosecutions had been taken too far. While traders should not be allowed to pay a corporate insider for non-public information, she said, Wall Street traders routinely “get a whole lot of information from people that you talk to all the time.”
Pressure on the SEC
According to C. Evan Stewart, a partner at Cohen & Gresser, the ruling might also pressure the U.S. Securities and Exchange Commission to better define and explain just which behaviors on Wall Street count as insider trading. Though the SEC does not dictate criminal laws, it does provide a standard at which criminal fraud laws can be applied to insider trading cases.
Source: The Chicago Tribune, U.S. court reverses fund managers’ insider trading convictions, December 10, 2014