October 8, 2015 By Jonathan R. Tung, JD
In a move that is sure to inflame the passions of Occupiers (a la, the 99 percent), SCOTUS refused, on Wednesday, to review a decision by the Second Circuit which threw out the convictions of hedge fund managers Anthony Chiasson and Todd Newman. The decision came as a major blow to both US Attorney Preet Bharara and the US Justice Department’s attempt to crackdown on insider trading in the midst of increasing disapproval from the public.
SCOTUS’ refusal all but affirms the Second Circuit’s narrow definition of insider trading.
In the Beginning
Hedge Fund managers Anthony Chiasson and Todd Newman were convicted in 2012 of insider trading which is broadly defined as the usage of non-public information by corporate insiders to buy and sell stock.
On appeal, the US Court of Appeals for the 2nd Circuit reversed both men’s convictions, and in so doing, shone a light on one the key elements of illegal insider trading.
Illegal vs. Legal
Not all insider trading is illegal, contrary to popular belief. Legal insider trading can be lawfully done with proper reporting. Illegal insider trading involves the use of non-public information and a breach of a fiduciary duty owed to some entity. The tentacles of that fiduciary duty, according to insider trading doctrine, can reach out and touch those who are not directly involved in the operations of the company. Enter in “tipper/tippee” insider trading.
In the opinion of the Second Circuit, in order to sustain a conviction for illegal insider trading, the prosecution must prove that the alleged tippee was aware that the tipper breached a fiduciary duty (owed presumably to his company and shareholders) and received some valuable consideration for providing that information.
Chiasson and Newman had received information from their staff analysts, who had themselves been tippees from a network of tipper analysts and other corporate insiders. Thus, both men were essentially shielded from actual contact with the original network of tippers. If Newman and Chiasson had directly received the information from that very same network the analysis would have been different — and would have likely resulted in an affirmation of the original convictions.
The decision by the Second Circuit was not just a win for Newman and Chiasson personally, but for insider traders in general. SCOTUS’ refusal to review the case, leaves intact the Second Circuit’s finding that the line between tipper and tippee must be very clear. Because SCOTUS refused to review the Circuit decision, many who were convicted under Manhattan US Attorney Preet Bharara’s watch could seek to have their own convictions overturned. Convicted insider traders like ex-SAC trader Michael Steinberg also stands to benefit from the decision.
For the foreseeable future, the Wall Street prosecutors will have to all but establish a smoking gun in order to successfully prosecute tipper/tippee cases.