The U.S. Supreme Court on Monday refused to hear the government’s appeal of an adverse court of appeals decision in an insider trading case which could make it harder to prosecute insider trading.
The decision threw out the 2012 convictions of hedge fund managers Todd Newman and Anthony Chiasson relating to tips about Dell and NVIDIA stock. The decision is seen as a blow to the government’s crackdown on insider trading in the three trillion dollar hedge fund industry. The decision could also jeopardize a number of other insider trading convictions secured by the U.S. Attorney’s Office for the Southern District of New York.
The prosecution arose from the release of information from insiders at Dell and NVIDIA concerning earnings announcements before the information was publicly released. The inside information was provided to analysts who in turn passed the information on to portfolio managers, including Newman and Chiasson, who executed trades in Dell and NVIDIA stock. The trades netted profits of $4 million dollars for Newman’s fund and $68 million dollars for Chiasson’s fund. The evidence at trial established that Newman and Chiasson were three to four levels removed from the original inside tip, and the corporate officials that leaked the information were not civilly or criminally charged with insider trading.
In December 2014, the U.S. Court of Appeals for the Second Circuit overturned both convictions. The Second Circuit ruled that the original tips were not unlawful because the company insiders had not disclosed confidential information in exchange for a personal benefit. This ruling was based upon the 1983 Supreme Court decision, Dirks v. Securities and Exchange Commission, which requires evidence that the insider “directly or indirectly” gained something from the initial disclosure. The Second Circuit interpreted the insider trading statute narrowly and required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly viable nature.” The Court concluded that Newman and Chiasson had learned about the earnings announcements from underlings at the now closed hedge funds and, as a result, were too far removed from the original release of inside information to be criminally responsible.
The Supreme Court refused to review the case without comment. The Justice Department had sought a review of the ruling and argued that it represented a significant change in insider trading case law. In requesting Supreme Court review, U.S. Solicitor General Donald Verrilli had stated that the Newman decision was a “road map for unscrupulous insiders.” U.S. Attorney Preet Bharara, whose office prosecuted the cases, called the Newman decision a “potential bonanza for friends and family of rich people with access to material non-public information.”
The Supreme Court’s refusal to review set aside the convictions of Newman, who was sentenced to 54 months in prison and Chiasson, who received a 78 month sentence. The Second Circuit decision is also likely to have a direct impact on convictions of several other than who were charged with trading on some of the same stock tips as Newman and Chiasson. Several cooperative witnesses who testified against Newman and Chiasson may also seek to overturn their guilty pleas based upon the Newman decision.
The ruling is seen as a major set-back for the insider trading crackdown in which 96 individuals had been charged.
