On December 10, the Second Circuit Court of Appeals issued its widely-anticipated decision in the appeal of the insider trading convictions of Todd Newman and Anthony Chiasson. The convictions were among dozens obtained in recent years by Preet Bharara, the United States Attorney for the Southern District of New York, who has made cracking down on insider trading one of his highest priorities. In a decision that sharply rebuked the prosecutorial strategies employed in cracking down on insider trading, the Second Circuit concluded that a higher standard was required to hold individuals liable for insider trading – particularly those individuals removed by several degrees from the original “tipper.” Ruling that the jury instructions given in the Chiasson and Newman cases was flawed, the Second Circuit not only unanimously reversed the convictions, but also dismissed each case with prejudice.
Newman and Chiasson were part of a “circle of friends” charged criminally and civilly by the government in 2012 with racking up tens of millions of dollars in illicit profits through well-timed trades in computer company Dell. The charges centered around a stock analyst’s receipt of a series of 2008 tips about Dell’s impending financial results, which were subsequently passed along to a network of other traders and analysts who used the information to place profitable trades. Both Newman and Chiasson, however, were several levels removed from the insiders at issue, and there was no dispute that neither man received information directly from a corporate insider or even from any person that had obtained information from a corporate insider. At trial, the jury was instructed that to find guilt, they needed only to find “that the defendant . . . knew the information had had obtained had been disclosed in the breach of a duty.” Both Newman and Chiasson were convicted, and appealed their sentences.
On appeal, the defendants took issue with the jury instructions given at trial, arguing that the instructions omitted critical factors established by legal precedent. The Second Circuit agreed, finding that the trial court’s instruction that the jury need not determine whether the defendants were aware of any quid pro quo arrangement between the tipper and initial tippee was erroneous. Instead, the Second Circuit held that the government must prove that tippee defendants not only knew that the information that had been disclosed was confidential, but also that the tipper disclosed that information in exchange for a personal benefit.
In reaching its decision, the Second Circuit also frowned on “the doctrinal novelty of [the government’s] recent insider trading prosecutions, which are increasingly targeted at remote tippees” such as the defendants in this case, “many levels removed from corporate insiders.” “Although the [g]overnment might like the law to be different,” the Court admonished, “nothing in the law requires a symmetry of information in the nation’s securities markets.” Those critical of the decision believe that it will critically hinder the government’s efforts to combat insider trading. While the decision will have no effect on tippers who provide information in breach of a confidential or fiduciary duty to their company, the decision arguably removes the taint of insider trading for downstream tippees simply by ensuring that there is no expectation of any benefit in exchange for giving away information. One of the likely effects of the ruling may be an increase in the number of cases brought by the Securities and Exchange Commission in house through civil administrative proceedings, where the Commission may avoid judicial oversight in favor of administrative law judges employed by the Commission.