The case of Todd Newman and Anthony Chiasson, where were convicted of insider trading in 2012, during New-York’s U.S. attorney, Preet Bharara’s astounding six-year run of 85 insider trading convictions before losing a case which netted him 60 other convictions. Last December, however, the 2nd Circuit overturned the Newman convictions, ruling that Bharara stretched the limits of insider trading laws too far, citing insufficient evidence. At issue is whether or not the giver of the confidential information must receive a benefit from providing the tip, and whether or not that benefit must be concrete and tangible to be considered insider trading.
As opposed to usually changing the legal world with its rulings, the biggest Supreme Court decision since June’s gay marriage ruling may involve a case they do not hear. On Monday, without comment, as is customary, the Court declined the Justice Department’s appeal of a 3-judge panel ruling by the 2nd Circuit Appeals court on a key insider trading decision. The case of Todd Newman and Anthony Chiasson, who were convicted of insider trading in 2012, during New-York’s U.S. attorney, Preet Bharara’s astounding six-year run of 85 insider trading convictions before losing a case which netted him 60 other convictions. Last December, however, the 2nd Circuit overturned the Newman convictions, ruling that Bharara stretched the limits of insider trading laws too far, citing insufficient evidence. At issue is whether or not the giver of the confidential information must receive a benefit from providing the tip, and whether or not that benefit must be concrete and tangible to be considered insider trading.
The panel based its ruling in part, on a fundamental 1983 Supreme Court decision regarding Dirks v. Securities and Exchange Commission, in which the Court ruled that a person must have “directly or indirectly” gained something from the initial disclosure. In Newman, the two fund managers involved were part of an information sharing group that called themselves the Fight Club (after the 2000 cult-classic film). The pair had received information regarding earnings from employees of companies Nvidia and Dell who were also part of the group, passing through several layers before eventually reaching them. Prosecutors claim that the fund that Newman managed gained $4 million from the information and Chiasson’s fund garnering up to $68 million. Newman was sentenced to 4 ½ years in prison and Chiasson 6 ½ years. The appeals panel reversed the convictions, however, claiming that a more tangible benefit than mere friendship must have been exchanged in order to constitute the Supreme Court’s interpretation of the law. This was not explicitly mentioned in Dirks by the Court however. By not accepting Newman, the Supreme Court has implicitly accepted the 2nd Circuit’s interpretation.
The ruling is a major blow to Bharara and his conviction record. Lower courts have already dismissed five cases under the Newman appeals precedent, including four who had already pleaded guilty. Among several other convictions that are now in jeopardy is that of Michael Steinberg, a former trader who worked for billionaire Steven A. Cohen and his SAC Capital Advisors hedge fund. Steinberg, who has an appeal pending, was convicted in 2013 of insider trading. Although it is likely that most of Bharara’s convictions will stand, it creates a major loophole in corporate law according to the prosecutor. Saying, “We think there is a category of conduct that will go unpunished going forward,” Bharara notes that it will be nearly impossible to convict persons of sharing information with friends and family. Ironically, Steinberg’s attorney Barry Berke agreed with Bharara, arguing that his client’s case should be dismissed because, “he did not commit any crime.”
Not helping matters is that the 1934 Security Exchange Act, the cornerstone trading law, does not specifically mention insider trading. The ambiguities in the law have been noted by both 2nd Circuit Judge Richard J. Sullivan, who helped to overturn Newman, as well as notable Visiting 9th Circuit Judge Jed Rakoff, who is also considered a heavyweight in financial cases. Both Sullivan and Rakoff have indicated that it is the legislature, and not the Executive branch that must more clearly define the laws. While efforts to further define insider trading has stalled in Congress, several more appeals are pending in the federal court system, including with Rakoff clouding the law’s clarity by affirming several insider trading convictions this summer on the 9th Circuit. One case in particular United States v. Salman appears to be the next to appeal for the Supreme Court’s consideration. Although it is possible the Court may find Salman more palpable than Newman, it is more likely that a separation of powers free-for-all will ensue over the coming few years over the issue between the Justice Department, the lower court system, and perhaps ultimately, a frustrated Congress.
Bloomberg Business – Greg Stohr and Patricia Hurtado
National Law Review – Brian E. Casey
New York Times – Matthew Goldstein and Adam Liptak