Discussing Second Circuit Insider Case, Winning Attorneys Weigh Possible Effects

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By Michael Greene

Jan. 9 — During a Jan. 5 PLI briefing, Gregory Morvillo, Morvillo LLP, who represented Level Global Investor LP co-founder Anthony Chiasson in the Second Circuit case that has been called a “blow to insider trading prosecutions,” said that he disagrees with the assertion that the reversal of his client's conviction will create “an open season to commit insider trading.” 

The U.S. Court of Appeals for the Second Circuit Dec. 10 overturned the convictions of Chiasson and ex-Diamondback capital Management LLC portfolio manager Todd Newman, ruling that “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 in exchange for a personal benefit”.

The opinion has made clear that knowledge of a personal benefit is required, said Morvillo. He added that it may require more work by the government to prove this knowledge, “but my belief is that the [government] will continue to do the same things it has done in the past, which is develop evidence in support of their theory and develop evidence in support of the law that they are trying to prove someone violated.”

However, he said that in a situation where someone is several levels removed from the insider and doesn't know of the personal benefit, that person probably shouldn't have been charged in the first place—even before the Second Circuit's ruling.

Steinberg Case

Morvillo also weighed in on what implications the court's decision may have on other cases. He said that it was likely that SAC Capital Advisor LP hedge fund manager Michael Steinberg, who was indicted as part of the same conspiracy as Chiasson and Newman, will have his conviction reversed as well.

The U.S. Court of Appeals in New York Dec. 31 granted Steinberg's request to keep his appeal on hold while prosecutors decided whether to seek further review of the court's ruling in the Chiasson and Newman case.

According to Morvillo, Steinberg appears to be in a similar position to Chiasson and Newman and his appeal will depend on whether the government proved at trial that he had knowledge of a personal benefit to the tippee.

As to the 80 or so other insider trading cases brought by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara as part of a multi-year probe, Morvillo said that it would be difficult to determine who specifically may be able to go back and have their conviction overturn.

However, he said that the vast majority of these cases will stand in light of the Second Circuit's opinion because they involve first-level tippees or people who were providing the benefit. He added that it would be an uphill battle for many to have their guilty pleas withdrawn because the Second Circuit relied heavily on the U.S. Supreme Court's decision in Dirks v. SEC, which has stood for 30 years.

Misappropriation Cases

Alexandra A.E. Shapiro, Shapiro, Arato Isserles LLP, who also represented Chiasson, said during the same webinar that the Second Circuit's decision also will likely apply to misappropriation cases.

“I think the court was intending to, and did, clearly put misappropriation cases on the same footing as classical theory cases, she said.

She noted that in another insider trading case in the Southern District of New York, U.S. District Judge Andrew Carter has questioned whether the Second Circuit's opinion applies to misappropriation cases.

She said the government appears to be arguing that there is a distinction in applying the Second Circuit's ruling to misappropriation cases.

Next Steps for the Government

Shapiro believes that there are several obstacles the government could face if it seeks an en banc rehearing before a full Second Circuit.

The government asked for another month to decide whether and how to appeal the Second Circuit panel ruling, but submitted a brief in another case criticizing the Second Circuit's decision.

Shapiro noted that the Second Circuit's opinion was unanimous and that en banc review is very rare in the Second Circuit. Accordingly, the court only allows en banc review for zero to two cases a year, which is dramatically lower than other circuits.

According to Shapiro, the U.S. Supreme Court also may not provide a great forum for the government in this type of case. In the past 20 to 30 years, there have been a number of cases where the Supreme Court has interpreted criminal statutes more narrowly than the lower courts, she said.

Morvillo noted that the Securities and Exchange Commission and Congress have the ability to create a rule that would overrule the court's decision. But he believes that the more-prudent action might be to wait and see how this case impacts future prosecutions.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com