• Bharara's remarks come hours after Supreme Court rebuff
  • High court refuses to hear appeal in Newman, Chiasson case

Executives and fund managers will have a “bonanza” leaking secret tips after the U.S. Supreme Court declined to weigh in on the most significant insider-trading case in a generation, the top federal prosecutor in Manhattan said.

There’s now “an obvious road map for unscrupulous investors,” U.S. Attorney Preet Bharara said at a press conference Monday, hours after the high court let stand the ruling, which makes it harder to prosecute insider trading.

At least 90 percent of the cases he’s brought will survive, Bharara said. But the decision puts at risk a “small subset” of some of the 87 convictions gained over his six-year crackdown on fund managers, corporate insiders and consultants, he said. So far, seven convictions have been reversed because of the appeals-court decision. Other cases are pending.

Rejecting the administration appeal without comment, the high court refused to consider reinstating the overturned convictions of hedge fund managers Todd Newman and Anthony Chiasson. The Supreme Court’s rebuff was announced in a list of orders released on the first day of its new nine-month term and is a blow to Bharara, who has spearheaded the attack on illegal tipping.

Press Ahead

Sounding resigned to the defeat, the prosecutor vowed to press ahead with his pursuit of traders and fund managers who traffic in illicit information and urged the government to push forward with cases that may win favorable court rulings.

“The Newman decision was wrong,” Bharara told reporters. "You can think of it as a potential bonanza for friends and family of rich people who have access to material nonpublic information.”

Among those who may benefit is SAC Capital Advisors LP’s Michael Steinberg, who is seeking to reverse his own conviction on similar grounds. Steinberg’s attorney, Barry Berke, said in a statement that his client’s conviction must now be tossed as well since it’s now clear “he did not commit any crime.” Bharara declined to comment on Steinberg.

The lower-court decision raised the bar for prosecutions stemming from information passed by a corporate insider to a friend, relative or business associate. In it, the New York-based federal appeals court said the benefit received by the leaker of illicit data must be a concrete one -- something more than the nurturing of a friendship. The Obama administration argued that it was enough if the insider made a gift of the information to a friend or relative.

New Cases

Now, Bharara said, federal prosecutors will “have to think long and hard” about whether to bring a case against an executive who leaks data about earnings “or anything else of a very sensitive nature” to “a relative or a buddy or a crony knowing absolutely that the person is going to trade on it.”

It’s no longer clear whether prosecutors will prevail if the executive didn’t receive a concrete benefit, he said.

“With that increased benefit requirement now the law, an entire class of tippers who knowingly traffic in inside information are shielded from prosecution,” said John Zach, a former federal prosecutor who worked on the Newman and Chiasson case for the government and is now a partner at Boies Schiller & Flexner.

James Cox, a law professor at Duke University, said Bharara is overstating the risk from the Supreme Court action. Prosecutors still have plenty of laws to use to target illegal tippers and traders who use their leaks, he said.

Prepare Cases

“It’s not the end of the world,” Cox said in an interview. “The government will prepare these cases a little bit better. They may have gotten seduced by their own success and gotten a bit sloppy.”

It’s also possible the Supreme Court will take up the issue in a later case if federal appeals courts overseeing other states reach differing conclusions on the issue, said Patrick Cotter, a former prosecutor who is now a lawyer at Greensfelder, Hemker & Gale and isn’t involved in the Newman appeal. He said the timing may depend on whether government lawyers ask judges to further interpret insider-trading laws, as Bharara urged.

Analysts for Newman, a former portfolio manager at Diamondback Capital Management LLC, and Chiasson, co-founder of Level Global Investors LP, were part of a group of information-swapping friends who called themselves the “Fight Club,” after a Brad Pitt film.

The two 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.

Finance Unit

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. Newman was sentenced to 4 1/2 years in prison and Chiasson 6 1/2 years.

“Unfortunately, this victory comes only after years of government overreaching,” Newman’s lawyers, Stephen Fishbein and John Nathanson, said in a statement.

Chiasson’s lawyer, Gregory Morvillo, said his client “is deeply gratified by this complete vindication, one that ends the five-year ordeal he and his family endured.”

The appeals court in December also said the person being prosecuted had to know about the benefit. That issue wasn’t before the Supreme Court.

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.

The Supreme Court has defined insider trading 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. In a 1980 case the Supreme Court rejected the idea of “a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.”

The case is United States v. Newman, 15-137.

(A previous version of this story was corrected to change Dell Corp. to Dell Inc.)

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