It appears that the U.S. Supreme Court has dealt a serious blow to prosecutors in insider-trading cases. The high court let stand a major insider-trading ruling that threatens at least 10 convictions and creates what the Obama Administration calls a road map for securities fraud. Rejecting an administration appeal without comment, the justices refused to consider reinstating the overturned convictions of hedge fund managers Todd Newman and Anthony Chiasson.
This ruling is seen as a blow to U.S. Attorney Preet Bharara, the New York prosecutor, who had more than 80 insider-trading convictions during a six-year attack on “crooked fund managers, corporate insiders and consultants.” The lower court ruling had been issued by the New York-based federal appeals court that is considered especially influential in securities-fraud cases. The decision raised the bar for prosecutions arising from information passed by a corporate insider to a friend, relative or business associate.
The Obama Administration believes the decision immunizes conduct that had long been understood to be criminal. The ruling “insulates from liability deceptive acts that undermine the integrity of the markets,” U.S. Solicitor General Donald Verrilli argued in the government’s appeal. The Supreme Court said in 1983 that people who trade on confidential information can be prosecuted only if the insider reaped a benefit from the leak. At issue in this appeal was whether that benefit must be a concrete one, as the lower court ruled. The Obama Administration argued that it was enough if the insider made a gift of the information to a friend or relative.
Analysts for Newman, a former portfolio manager at Diamondback Capital Management, and Chiasson, co-founder of Level Global Investors, were part of a group of information-swapping friends who called themselves the “Fight Club,” which came from a Brad Pitt movie. The two men were convicted of trading based on leaks that started with people at Dell Inc. and Nvidia Corp. In the case of Dell, the information came from an employee in the company’s corporate-development department who gave pre-announcement earnings information to an analyst. The tip eventually reached Newman and Chiasson through analysts who worked for them.
With Nvidia, the disclosure began with an employee in the company’s finance unit who provided earnings numbers to a friend, who then passed the information to an analyst. The information made its way to Newman and Chiasson through the same circle of analysts involved in the Dell leak. Prosecutors said the information earned $4 million for Newman’s fund and $68 million for Chiasson’s fund. Newman was sentenced to 4 1/2 years in prison and Chiasson 6 1/2 years. Their convictions were overturned on appeal.
In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received “a clear benefit – something more than the nurturing of a friendship.” The appeals court also said the person being prosecuted had to know about the benefit. That issue wasn’t before the Supreme Court.
But it appears that an entire class of tippers who knowingly traffic in inside information are now shielded from prosecution. The ruling has already prompted the dismissal of cases against five people, including four who had already pleaded guilty.
It appears that insider trading is defined to encompass only those instances where a person violates a fiduciary duty to shareholders – such as when an employee personally benefits from a leak of nonpublic information. The standards for insider trading are unclear in part because the 1934 law used for prosecutions doesn’t specifically mention the practice. Over the years, the Supreme Court has concluded that insider trading is a type of fraud, which is explicitly covered by the Depression-era statute.
Source: Insurance Journal
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