Tippee Convictions Tossed, Tax Deals, Google Tax: Compliance

Insider-trading prosecutions became harder after a key federal court raised the bar on what the government must prove to convict, imperiling a handful of victories for the Justice Department in its multiyear probe.

Traders must know their tip came from someone who not only knew it was secret, but got something for leaking it, the U.S. Court of Appeals in New York said. In doing so, it threw out convictions of hedge fund managers central to Manhattan U.S. Attorney Preet Bharara’s investigation of illicit trading at hedge funds and expert networking firms.

The court agreed with Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman, who argued that their guilty verdicts should be overturned because jurors weren’t told that, to find them guilty, prosecutors needed to show they knew the original source of the tip received a benefit.

The unanimous three-judge panel threw the case out “with prejudice,” essentially exonerating the men and barring retrial. In doing so, they undercut the convictions of others swept up in the probe brought by Bharara, including ex-SAC Capital Advisors LP fund manager Michael Steinberg, whose jury received the same faulty instructions. His appeal has been delayed by the current case.

Bharara, in a statement yesterday, said the ruling “will limit the ability to prosecute people who trade on leaked inside information,” adding that the ruling “appears” to narrow what was considered insider trading.

Steinberg’s conviction was among the biggest victories for Bharara in his prosecution of wrongdoing on Wall Street, and at SAC Capital in particular. SAC Capital founder Steven A. Cohen was never charged or sued.

The investigation of the two men led to the shuttering of Diamondback and Level Global.

Gregory Morvillo, an attorney for Chiasson, hailed the decision, saying it “unequivocally re-establishes” his client’s innocence.

Stephen Fishbein, Newman’s lawyer, said he was “relieved but not surprised” by the decision, adding that the vindication unfortunately came after “four years of unnecessary prosecution.”

Steve Bruce, a spokesman for Diamondback at ASC Advisors LLC, declined to comment on the verdict.

“Today’s legal vindication is a reminder how prosecutorial recklessness has real impact on real people,” said David Ganek, a co-founder of Level Global.

The “decision clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well,” Steinberg’s lawyer, Barry Berke, said in a statement.

The case is U.S. v. Newman, 13-1917, U.S. Court of Appeals for the Second Circuit (Manhattan).

Compliance Action

SEC Lacks Reliable Tools to Monitor Employee Trades, Audit Says

The U.S. Securities and Exchange Commission lacks a reliable system for ensuring that its employees don’t trade stocks of companies under investigation, the agency’s watchdog said.

The SEC’s computer program for monitoring employee trades approved eight transactions from 2009 to 2011 that violated the agency’s ethics rules because they were in shares of companies being probed by the regulator, according to an audit released yesterday by SEC Inspector General Carl Hoecker.

Scrutiny of the SEC’s enforcement of its own ethics rules increased after the previous inspector general in 2010 accused three agency attorneys of improper trading. The issue flared up again in November 2013, when Steven Gilchrist, a New York-based SEC examiner, was arrested and later admitted to having misled investigators about bank stocks he owned.

In late 2013, several other employees in the New York regional office were told their personal holdings violated trading rules, a person familiar with the matter said at the time. The agency’s ethics rules prohibit employees from owning shares of most Wall Street banks, which have brokerage and asset-management units that the agency regulates.

In a letter responding to the audit, SEC Ethics Counsel Shira Pavis Minton said the agency would make changes to improve compliance, including adding a tool to make it easier to review employees’ brokerage statements electronically.

Disney, Skype Among New Tax-Deal Revelations in Luxembourg

Walt Disney Co. and Microsoft Corp.’s Skype unit are among hundreds of companies that benefited from lower taxes through “secret” deals with Luxembourg, according to a report released late on Dec. 9 by a group of investigative journalists.

More than 340 companies have transferred profits to Luxembourg using complicated tax arrangements, the group of more than 80 journalists said in a report on Nov. 5.

The latest disclosures give details of the tax deals for 35 companies.

Luxembourg’s Ministry of Finance, which has said that its so-called tax rulings are not secret, is pushing to set up oversight of such rulings next month as Prime Minister Xavier Bettel promised that the country is doing all it can to clean up its “damaged image.”

Interviews/Commentary

KPMG Sees Concern ‘Google Tax’ May Spread Beyond U.K.

Multinationals such as Google Inc. are concerned that a U.K. clampdown on tax breaks will be emulated in other countries, according to Christopher Morgan, head of U.K. tax policy at KPMG LLP.

He talked with Guy Johnson on Bloomberg Television’s “The Pulse.”

For the video, click here.

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