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Bar Raised for Insider Trading Prosecutions

December 10, 2014

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In a landmark case which many view as a blow to the Justice Department’s aggressive pursuit of insider trading cases, the Second Circuit reversed the insider trading convictions of Todd Newman and Anthony Chiasson, portfolio managers at two different firms.

Prosecutors alleged that Newman and Chiasson were downstream tippees in an insider trading scheme. A jury agreed and convicted the two men. But the Second Circuit did not, reversing the convictions and ordering the dismissal of the indictment. Annunciating a new standard for tippee liability, the Court held that in order to sustain a conviction for insider trading, prosecutors must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.

To sustain an insider trading conviction against a tippee, the Government must therefore prove beyond a reasonable doubt that:  (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.

Here, the Court found, the evidence was insufficient to sustain a guilty verdict for two reasons.  First, the evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the evidence offered on the issue of personal benefit was sufficient, prosecutors presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.  In so holding, the Court emphasized that Newman and Chiasson were three to four steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information. It further noted that the Government chose to pursue Newman and Chiasson before bringing administrative, civil, or criminal insider trading charges against the original tippers of the insider information. U.S. v. Newman and Chiasson.

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