Insider Trading Jury Instructions Assailed by U.S. Court

A U.S. appeals panel criticized a judge for making it too easy to convict two hedge fund managers of insider trading, lending support to claims their verdict was unfair and possibly unraveling other government cases if the court rules in their favor.

Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman argued their convictions should be overturned because jurors weren’t required to find the traders knew that the source of their illegal tip received a benefit. The government said jurors only needed to find the men knew it was material nonpublic information, and that the tipper was breaching a fiduciary duty by revealing it.

A decision by the three-member panel of the U.S. Court of Appeals in New York favoring the fund managers could imperil the conviction of SAC Capital Advisors LP fund manager Michael Steinberg whose jury got the same instructions as Chiasson’s and Newman’s. Steinberg’s conviction was among the biggest victories for Manhattan U.S. Attorney Preet Bharara in his prosecutions of Wall Street wrongdoing, and at SAC Capital in particular.

The financial sector should be assured innocent actions won’t be criminalized by zealous prosecutors, U.S. Circuit Judge Barrington Parker said yesterday.

“We sit in the financial capital of the world,” Parker said. The atmosphere that you have “gives precious little guidance to all the institutions, all the hedge funds, that are trying to come up with some bright line rule of what they can and can’t do.”

Too Easy

Parker and his colleagues, U.S. Circuit Judges Peter Hall and Ralph Winter, yesterday all expressed concerns that U.S. District Judge Richard Sullivan had made it too easy for the U.S. to win insider trading cases.

Sullivan instructed the jury in Chiasson’s and Newman’s trial that as long as prosecutors proved they knew the tips they traded on weren’t public and breached a fiduciary duty, they could be convicted of insider trading. He didn’t tell the jury that they also must have known the tipsters benefited.

Chiasson and Newman pointed to four other federal judges who required that all three elements had to be found by jurors before they could convict.

Assistant U.S. Attorney Antonia Apps yesterday argued Sullivan had correctly instructed the jury, with Parker questioning the assertion.

“It looks like the government is taking completely inconsistent views on a critical point of law,” Parker said. “I’m concerned that the government is taking the position in these key points of law, which seems to vary depending on which judge you’re talking to.”

$72 Million Scheme

Chiasson and Newman were convicted in December 2012 of being part of a sprawling $72 million insider-trading scheme in which a group of analysts and insiders swapped illicit tips about Dell Inc. and Nvidia Corp and which they funneled to their fund managers.

Both were in court yesterday and both declined to comment on the appeals arguments.

Steinberg’s lawyer, Barry Berke, who was in court for the appeals hearing, last year asked Sullivan to remove himself from Steinberg’s case, arguing that prosecutors had improperly steered it to a judge who made it easier to win insider trading convictions. Berke declined to comment on yesterday’s hearing.

Parker Interruption

Just as Apps stood to begin arguing for the U.S., Parker interrupted her to raise an issue that wasn’t part of the appeal -- why the government chose to file Steinberg’s insider-trading case as a related case with Sullivan.

“I notice a pattern,” Parker said. “Can you allay concerns about what the government did to move these cases around until they could get their main case before Judge Sullivan, their preferred venue?”

Steinberg’s case was viewed as a related case because Sullivan had already heard the testimony from the series of cooperating witnesses who had testified in Chiasson’s and Newman’s case, Apps responded.

U.S. District Judge Jed Rakoff, in the case of Whitman Capital LLC hedge fund founder Doug Whitman; former U.S. District Judge Richard Holwell, in the case of Galleon Group LLC co-founder Raj Rajaratnam and U.S. District Judge Paul Gardephe, in the trial of SAC Capital portfolio manager Mathew Martoma, all required jurors to consider the three elements of insider trading, as opposed to the two Sullivan instructed the jury on.

However, although the other judges in the insider-trading cases have required jurors to find the extra element of personal benefit to convict, Rajaratnam, Whitman and Martoma, all were found guilty.

New Trials

New trials could be ordered for Chiasson, of Manhattan, who was sentenced to 6 1/2 years in prison, while Newman, of Needham, Massachusetts, got a 4 1/2-year term.

Newman’s lawyer Stephen Fishbein declined to comment yesterday, while Chiasson’s lawyer, Greg Morvillo said in a statement: “Today marks an important step in Anthony Chiasson’s multi-year quest to prove his innocence.”

Also yesterday, former Galleon Group LLC trader Zvi Goffer, who was convicted and jailed in 2011 for trading on tips leaked by lawyers, asked the appellate court to reopen his appeal so he may advance the same claims as Newman and Chiasson. Goffer, who was tried before Sullivan, lost his appeal last year.

“Identical issue, identical jury instructions and judge,” Goffer’s lawyer, Yale Klat said in an interview.

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).

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