Level Global Investors LP co-founder Anthony Chiasson and former Diamondback Capital Management LLC portfolio manager Todd Newman, sentenced to prison for insider trading, can remain free while they fight their convictions, an appeals court ruled today.
Chiasson, of Manhattan, was ordered last month to serve 6 1/2 years in prison, while Newman, of Needham, Massachusetts, was sentenced to 4 1/2 years after they were convicted by a federal jury in Manhattan for being part of a $72 million insider-trading scheme.
“We grant the motion to remain free pending appeal,” U.S. Circuit Judge Jose Cabranes said today after a three-judge panel heard arguments at the Manhattan court. Cabranes said the trial judge will handle any requests to modify bail conditions.
The defendants’ lawyers argued they should remain free because there is a “substantial question” of law to be decided in the case. The fund managers said U.S. District Judge Richard Sullivan, who presided over their trial, issued a ruling that made it easier for the government to prove culpability for insider trading.
The defense lawyers argued that two other federal judges in Manhattan have ruled differently than Sullivan in securities fraud cases, concluding that the recipient of a tip isn’t liable for insider trading unless he knew the person who provided the illegal information did so for a personal benefit.
“It should not depend on which judge he drew and how that judge came down on a hotly debated issue,” Stephen Fishbein, a defense lawyer for Newman, told the appeals court panel today.
Fishbein said that a recipient of an insider’s tip must have knowledge that a tipper received a personal benefit for the illicit information in order for the conviction to be upheld. He said that without it, the guilty verdict should be thrown out.
Prosecutors argued at trial that Chiasson and Newman were part of a group of portfolio managers, fund analysts and technology company insiders who shared material nonpublic information about information about Dell Inc. and Nvidia Corp. and then traded on them.
Defense attorneys said today that Sullivan’s position is contrary to earlier rulings by U.S. District Judge Jed Rakoff in the insider-trading case against Whitman Capital LLC hedge fund founder Doug Whitman and former U.S. District Judge Richard Holwell’s decision in the insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam. Both were convicted by juries.
“The tippee has to know the tipper has breached his fiduciary obligation,” Chiasson’s lawyer, Mark Pomerantz, told the appeals panel.
Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara said Sullivan didn’t err and that both men should begin serving their terms. They cited evidence that Newman had paid the wife of one tipper who funneled him inside information about Dell.
U.S. Circuit Judge Barrington Parker asked Assistant U.S. Attorney Antonia Apps about the rulings by U.S. judges in other insider trading cases which were contrary to Sullivan’s finding.
“This sounds to me like this is going to be a very lively appeal,” Parker said. “You have Judge Sullivan and Judge Rakoff, who are arguably the best in the business who see this differently.”
“Lively though the appeal may be, it does not make it a ‘close question’” Apps said. “The facts here were overwhelming. There were multiple tips each quarter, multiple times in a row. The nature and specificity of the tip were such that they were clearly of an insider nature.”
Sullivan last month denied requests by both men to remain free pending appeal citing this legal issue. He ordered Newman to surrender to the U.S. Bureau of Prisons by July 8 and Chiasson to begin serving his term by Aug. 13.
U.S. Circuit Judge Guido Calabrese asked today if there’s any risk the men will flee or be a danger to the community if released. Apps said the government didn’t view either man as a flight risk or danger to the community.
“Let me say that there is no issue of risk of flight or danger to the community,” said Pomerantz. He told the panel his client was prepared to remain at home with his wife and children on Manhattan’s Upper East Side until the court rules on the merits of his appeal, which will be heard later this year.
Fishbein and Newman declined to comment after the hearing as did Chiasson and his lawyers, Pomerantz and Greg Morvillo.
Cabranes presided over a December bail hearing for Rajat Gupta, the former Goldman Sachs Group Inc. director convicted last year of insider trading. That panel granted Gupta permission to remain free while he fights his conviction.
Six others charged with being part of the insider-trading ring with Chiasson and Newman have pleaded guilty and are cooperating with the U.S., including Jon Horvath, a former analyst at SAC Capital Advisors LP’s Sigma unit. In March, Michael Steinberg, a portfolio manager to whom Horvath reported, was indicted by prosecutors in Bharara’s office.
To date more than 80 people have been charged and more than 70 have pleaded guilty or been convicted at trial of insider trading since the Manhattan U.S. Attorney and the Federal Bureau of Investigation in New York began a crackdown on insider trading by portfolio managers, analysts and company employees.
The appeals case is U.S. v. Newman and Chiasson, 13-1917, U.S. Court of Appeals for the Second Circuit (Manhattan). The lower court case is U.S. v. Newman, 1:12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).