New York-based U.S. Attorney Preet Bharara may be the greatest prosecutor who ever lived. From the Bernie Madoff scandal to Toyota, to a large portion of the New York state legislature; he has left a historic level of convictions and penalty awards. This includes a remarkable streak of 85 consecutive insider trading convictions before losing one acquittal in an investigation that netted over 60 people. Despite Bharara’s office handling a multitude of cases that include leading the criminal investigation into General Motors, he has also successfully convinced the Justice Department to allow him to petition for a Supreme Court review of a controversial appeals court decision that dramatically narrowed the definition of insider trading.
Several of Bharara’s insider trading convictions and pleas may be put in jeopardy following last December’s 2nd Circuit Appeals Court ruling that overturned the convictions of two hedge fund traders, Todd Newman and Anthony Chiasson. Both were convicted in 2012 during Bharara’s streak; however the three-judge panel believed that the prosecution based their case on insufficient evidence, stretching the limits of insider trading laws too far. Moreover, the panel ruled that prosecutors must prove that traders knew that they had the potential to gain some kind of tangible reward for the information they provide. The panel ruled that it did not have to necessarily be financial, but it could not be solely for the purpose of gaining friendship or advice from the recipient. In addition to the Newman ruling already unleashing a floodgate of appeals, it will make it much more difficult to prove future cases.
9th Circuit Judge Jed Rakoff, who has spoken previously about the need for Congress to formally define insider trading laws instead of the courts, issued an opinion in a separate case last month, cautioning against a narrow definition of insider trading. Rakoff wrote that it could lead to an increased level of informal cronyism in which executives could interchange tips with family and friends who profit from the information despite no expectation of reward. The Newman decision clashed with most prior appeals rulings, with the split record likely attracting the Supreme Court’s attention. Federal prosecutors have cited that the 2nd Circuit misinterpreted key parts of the 32 year-old Dirks vs. The Security and Exchange Commission ruling, considered to be the key insider trading legal precedent.
Solicitor General Donald Verrilli filed the petition on Thursday on behalf of the Justice Department and the Obama Administration. In the document, Verrilli writes, “The effect of the new rule will be to hurt market participants, disadvantage scrupulous market analysts, and impair the government’s ability to protect the fairness and integrity of the securities markets. Those harmful consequences warrant this court’s review.” The move could be risky for both Bharara’s insider trading track record, as well as for Wall Street. Given that most circuits have ruled in contrast to Newman, many had expected federal judges to whittle away at the ruling anyway; whereas a Supreme Court Decision for better or worse, will be entrenched in legal code. A ruling in Bharara’s favor, however, could make Wall Street insiders will fear the need to take a high degree of caution on nearly everything they say. Congress could intervene with its own definition of insider trading, although appeals of any legislation could also land the issue back into the Court’s lap.
Bloomberg Business – Sheelah Kolhatkar
New York Times – Alexandra Stevenson and Matthew Goldstein
Wall Street Journal – Jacob Gershman