U.S. Says IBM Insider Cases Should Not Be Affected by Second Circuit Case

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By Patricia Hurtado

Jan. 20 — U.S. prosecutors told a judge Jan. 19 that he should throw out the cases of defendants who admitted using inside tips to trade IBM Corp. shares if he agrees with their lawyers' analysis of an appeals court opinion.

U.S. District Judge Andrew Carter last month questioned whether he should dismiss cases against five men accused of earning more than $1 million trading on tips about IBM's acquisition of software company SPSS Inc. in 2009. Four men pleaded guilty to the charges while a fifth, who has pleaded not guilty, is scheduled for trial next month.

The five contend that a sweeping U.S. Court of Appeals for the Second Circuit ruling last month that made insider trading prosecutions more difficult in some circumstances means they should go free. Prosecutors have argued that the appellate ruling doesn't apply to the IBM case.

In a Dec. 10 ruling overturning the insider trading convictions of two fund managers, the appeals court held that to be found guilty, defendants must know their tips came from someone who not only had a duty to keep it secret but also got a benefit for leaking it. Prosecutors said the IBM case was different and told Carter the appeals court ruling shouldn't affect it.

‘Erroneous' Ruling

In the Jan. 19 letter to Carter, prosecutors called the appeals court's ruling involving former hedge fund managers Todd Newman and Anthony Chiasson “erroneous.” If the judge agrees with the defense lawyers' interpretation of the ruling, however, they conceded that the four guilty pleas in the IBM cases should be vacated and pending charges against them and the fifth defendant dismissed.

“In short, given the government's interest in resolving the defendants' cases together, the government submits that if the court applies Newman here, then it should dismiss the indictment against all five defendants,” Assistant U.S. Attorneys Jessica Masella and Andrew Bauer wrote.

Four of the five worked together as stockbrokers, and one of them obtained the inside information from a lawyer working on the deal, according to prosecutors. The lawyer wasn't charged with wrongdoing.

Lawyers for the five men accused in the IBM case separately urged Judge Carter to dismiss the charges, saying the facts of their case don't satisfy the appeals court's stiffer requirements necessary to find someone guilty of insider trading.

“The government tacitly has acknowledged that their interpretation of Newman will not be adopted by Judge Carter and they would rather have the case dismissed than suffer another defeat in a jury trial,” said James Roth, a lawyer for one of the five defendants.

To contact the reporter on this story: Patricia Hurtado in Manhattan at pathurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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