The Second Circuit’s groundbreaking decision in United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014) is already having an impact on insider-trading prosecutions. On January 22, 2015, a judge in the Southern District of New York held that the Second Circuit’s landmark decision also applies to insider-trading cases brought under the “misappropriation” theory of insider trading.
As previously discussed on the PIB Law Blog, the Second Circuit ruled in Newman that, in order to sustain a conviction for insider trading, the Government 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. In so ruling, the court rejected the government’s argument that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability. The court also limited the definition of “personal benefit,” finding that “the mere fact of friendship, particularly of a casual or social nature” was insufficient to sustain a conviction.
In the wake of Newman, defendants currently facing insider-trading charges are seeking to reap its benefits. In United States v. Conradt, U.S. District Judge Andrew L. Carter, Jr. vacated four insider-trading guilty pleas. Judge Carter specifically rejected the government’s argument that Newman does not apply to insider-trading cases in which corporate outsiders misappropriate confidential information in breach of their fiduciary duty to the original source of the information.
According to Judge Carter, “The elements of tipping liability are the same, regardless of whether the tipper’s duty arises under the ‘classical’ or ‘misappropriation’ theory.” He further highlighted that “Newman’s unequivocal statement on [this] point is part of a meticulous and conscientious effort by the Second Circuit to clarify the state of insider-trading law in this Circuit.”
In related news, the government has filed a petition seeking panel and en banc rehearing in the Newman case. The petition focuses on the definition of what constitutes an actionable personal benefit, arguing that the Second Circuit’s definition is at odds with the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983). We will post additional updates as the matter develops.
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