The Second Circuit Court of Appeals recently overturned the insider-trading convictions of two New York hedge fund traders. The court’s groundbreaking decision in United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014) will make it more difficult for prosecutors to impose criminal liability on tippees who are not aware that insiders had disclosed the confidential information in exchange for a personal benefit.
The Facts of the Case
Former Level Global Investors LP manager Anthony Chiasson and former Diamondback Capital Management LLC manager Todd Newman were convicted for trading on inside information regarding Dell Inc. and NVIDIA Corporation. Neither individual received the information from the original tipper, but were several layers removed. On appeal, Newman and Chiasson argued that prosecutors should have been required to prove that they knew that the insider received a personal benefit for disclosing the confidential information.
The Second Circuit’s Decision
The Second Circuit agreed and vacated the convictions. “[We] conclude 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,” the panel held.
In reaching its decision, the Second Circuit highlighted that the tippee’s liability derives only from the tipper’s breach of a fiduciary duty, not from trading on material nonpublic information. Additionally, the corporate insider has committed no breach of fiduciary duty unless he or she receives a personal benefit in exchange for the disclosure. Finally, even when such a breach occurs, a tippee is liable only if he knows or should have known about it.
“We find no support for the government’ s contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability,” the court further explained. “Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.”
The Second Circuit’s decision will have a dramatic impact on the ability of federal prosecutors and the SEC to bring cases against individuals who are several degrees removed from the insider who initially tips the information. The ruling will likely also provide a means for other purported inside traders to appeal their convictions.
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