U.S. Seeks Review of Sweeping Ruling Limiting Insider Cases

Federal prosecutors in New York asked an appeals court to reverse a sweeping ruling making it harder for them to win insider-trading cases.

The Dec. 10 decision by a three-judge panel overturned the convictions of two former hedge fund managers and may lead to the dismissal of charges against others found guilty in a multiyear insider-trading probe.

It’s rare for appellate courts to agree to reconsider a ruling, especially when the original decision was decided unanimously. In last month’s 3-0 decision, the U.S. Court of Appeals in New York said recipients of inside tips are guilty only if they knew the data came from someone who had a duty to keep it secret and got a benefit for leaking it.

Prosecutors Friday asked for a rehearing by the panel and a hearing by the full court.

“The panel’s missteps will have serious consequences far beyond this case,” prosecutors said in their request. “The panel’s erroneous redefinition of the personal benefit requirement will dramatically limit the government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading.”

The decision conflicts with U.S. Supreme Court precedent and the appeals court’s previous rulings, prosecutors said in the filing. The ruling is “deeply confounding” and contrary to the appeals court’s intention to “supply clarity” to insider trading laws, prosecutors said, adding that it will confuse traders, judges and juries.

Chiasson, Newman

The Dec. 10 ruling overturned convictions of Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman, who were several steps removed from the leakers of Dell Inc. and Nvidia Corp. data. They argued on appeal that they didn’t know that the tipper, whom they never met, had received a benefit for his disclosures.

The decision, which barred retrial of the two men, may lead to a reversal of the convictions of six others who pleaded guilty in the case and cooperated with prosecutors. SAC Capital Advisors LP fund manager Michael Steinberg, who was found guilty in another case of trading on the same leaks, says he too is entitled to a reversal under the ruling.

Greg Morvillo, a lawyer for Chiasson, said the ruling “unequivocally confirmed Mr. Chiasson’s innocence under the law.”

“Mr. Chiasson has the utmost faith in the criminal justice system, which affords the government the opportunity to seek this review,” Morvillo said.

Stephen Fishbein, an attorney for Newman, declined to comment earlier Friday on the government’s decision to challenge the ruling.

Convictions Imperiled

The appeals court ruling has imperiled some of the more than 85 convictions won by Manhattan U.S. Attorney Preet Bharara in a multiyear insider-trading probe. This week, a federal judge set aside guilty pleas by four men who admitted to earning more than $1 million from trading on inside information about an IBM Corp. acquisition. The case against a fifth man who pleaded not guilty was also put on hold after having been scheduled to go to trial in February.

In its filing Friday, the government said for the first time that it’s no longer challenging the idea that a person who trades on inside information must know that the person who supplied it got a benefit in return.

Prosecutors said that higher standard gives defendants “absolution of deliberate, corrupt, and formerly criminal insider trading.”

Usurping Jury

The appeals court shouldn’t have reversed the convictions and then exonerated both Newman and Chiasson, prosecutors said. The judges “usurped the jury’s role in making factual determinations,” the government said. The cases should have been sent back for retrial with a requirement to meet the higher standard.

Prosecutors also argued the U.S. Supreme Court and the Manhattan appeals court have upheld convictions in which tippers got non-monetary benefits, such as favors or friendship, in exchange for illegal tips.

In its December ruling, the appeals court had said that mere friendship in exchange for inside tips wasn’t enough, and instead that trader must know that the person who supplied the data did so for “pecuniary gain” or “meaningfully close personal relationship” which also represents a potential gain of money or something similarly valuable.

Sufficient Evidence

Prosecutors said there was enough evidence to support Newman and Chiasson’s convictions because the Dell and Nvidia insiders who passed the information to their analysts did get benefits in exchange for the tips, including job advice and, for one source, financial payments. The U.S. argued there was substantial proof that both fund managers made conscious efforts to avoid knowing what the sources of their data got in return and that they traded on inside information that had been illegally obtained.

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

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