Just when Wall Street thought it was safer to trade on illicit tips, the U.S. government is pushing to reverse what it calls a harmful and unprecedented court ruling on insider trading.
U.S. Solicitor General Donald Verrilli on Thursday asked the Supreme Court to review a federal appeals court decision from New York that he said will encourage corporate insiders to pass confidential information to friends, relatives and business acquaintances.
Verrilli may be taking a chance in seeking the high court review as the justices have been skeptical of government arguments in some recent criminal appeals.
The justices are likely to be “concerned about the rights of the accused to fair notice that their actions are insider trading,” said Sam Lieberman, a lawyer who has represented individuals and investment advisers in civil and criminal investigations. “That is particularly so given the court having five conservative votes that favor limited government.”
Four of the nine Supreme Court justices must vote to hear the case before it can be considered. The court won’t be in session until October.
The lower court said prosecutors must prove that a person who traded on an illegal tip knew that the source received a personal benefit for violating a duty to keep it secret. And the benefit has to be something more than just friendship, the court said. It’s the latter ruling that the government is attacking in its request to the Supreme Court.
“The effect of the new rule will be to hurt market participants, disadvantage scrupulous market analysts, and impair the government’s ability to protect the fairness and integrity of the securities markets,” the government said.
The high court may be more inclined to take up the appeal because of what Verrilli said disagreement between courts in New York and San Francisco. The San Francisco court declined to adopt the New York court’s reasoning in an insider-trading appeal, he said.
The San Francisco court “rejected the novel personal benefit test fashioned by the court in this case,” Verrilli said in his filing to the top court.
If the Supreme Court refuses to hear the case or agrees with the New York court, some of the more than 80 insider trading convictions won by Manhattan U.S. Attorney Preet Bharara in the past six years might be threatened. It would also make it harder for the government to prosecute such cases in the future.
Betsy Feuerstein, a Bharara spokeswoman, declined to comment on Verrilli’s decision to seek the Supreme Court review.
The December decision, by the appeals in Manhattan, threw out the convictions of Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.
The appeals court acquitted Chiasson “because there was no evidence that he had knowledge of any benefit provided to any corporate insider,” his lawyer, Gregory Morvillo said in a statement. Chiasson is confident the lower court ruling will stand up to Supreme Court review.
Stephen Fishbein, a lawyer for Todd Newman, didn’t immediately return voice-mail or e-mail messages seeking comment.
The New York appeals court, which has jurisdiction over Wall Street, reviews more criminal securities cases than any other. Its rulings are often looked to for guidance by courts throughout the U.S. in insider-trading cases.
“When the Second Circuit takes the law of insider trading off course, other courts may follow,” the government argued in its petition.
The case is U.S. v. Newman, 13-1837, U.S. Court of Appeals for the Second Circuit (Manhattan).