A seminal case is now being heard in the US appeals court system, whose ramifications may make it more difficult for government prosecutors to file and prove charges of insider trading. A decision on this matter may serve as precedent that would affect several high profile guilty verdicts already reached, such as the one imposed on Michael Steinberg of SAC Capital Advisors.
The issue at bar with the 2nd US Circuit Court of Appeal in New York has divided many state judges: whether or not the recipient of the non-public information should have known that the source of the tip also benefited from the information in order to be convicted of insider trading.
This is the question brought on appeal by Todd Newman, once a portfolio manager from Diamond Capital Management as well as Anthony Chiasson, the founder of Level Global Investors hedge fund. The two were convicted back in 2012 for their participation in the earning of $72 million in illicit profits after they had traded using non disclosed information on Dell Inc. and Nvidia Corp.
According to the prosecution's case, both Newman and Chiasson had traded shares in the company using tips they received from analysts who worked in their respective firms. These analysts, the government claims, were members of a 'corrupt circle' of investment analysts that shared non-disclosed information they received from their network of insiders placed in various publicly listed companies, such as Dell and Nvidia.
Newman, now 46 has been meted out a sentence of 4-1/2 years jail time while Chiasson had received a 6-1/2 year sentence for their respective convictions. Both have been freed on bail pending the appeal they had filed.
If the convictions are overturned, this would be a significant defeat for Manhattan US Attorney Preet Bharara, who has already counted 80 individual convictions for insider trading since October 2009.
The reigning precedent was upheld in 1983, where the US Supreme Court said that a 'tippee' can only be 'found to have engaged in insider trading if the tipper benefited from the disclosure.' Now, it is being asked if prosecutors would be required to provide evidence that the tipee knew of the tipper's benefit, regardless if it is monetary or otherwise.
