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April 3 — The U.S. Court of Appeals for the Second Circuit declined April 3 to rehear its controversial Newman decision absolving two former hedge fund portfolio managers of criminal insider trading liability.
The ruling means that in the Second Circuit, prosecutors must show that an insider trading defendant knew that the source of the information received a personal benefit for disclosing it.
In declining without elaboration to reconsider its opinion, the court said both the panel that decided the appeal and the entire court sitting en banc considered—and rejected—the government's bid for rehearing.
Hailing the move, New York lawyer Gregory Morvillo, counsel to defendant Anthony Chiasson, said the Second Circuit's decision “powerfully reaffirms” his client's innocence.
He told Bloomberg BNA in an e-mail: “This victory is proof that the justice system worked how it is supposed to, with thoughtful judicial oversight when there are glaring errors at the trial court level.”
Through a spokesperson, U.S. Attorney Preet Bharara declined to comment.
In December, in a major blow to federal prosecutors, the appeals court threw out the convictions of Chiasson and his co-defendant Todd Newman for trading on inside information about two technology companies. It ruled that the government didn't prove that the two men—both downstream tippees—knew that the information was disclosed by an insider in exchange for a personal benefit.
The court also ruled that the government may not “prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature.” Rather, there must be “at least a potential gain of a pecuniary or similarly valuable nature.”
In January, backed by the Securities and Exchange Commission as amicus curiae, Bharara focused on the panel's “new and incorrect” definition of personal benefit in asking the Second Circuit to rehear the decision.
The SEC didn't respond immediately to a request for comment. Earlier this year, however, Enforcement Director Andrew Ceresney said the Newman decision won't stop the commission from bringing insider trading cases. At a lawyers' gathering, he said that while the opinion is significant, the agency still can bring other cases in other circuits and in administrative proceedings.
Nonetheless, the decision already has affected a number of pending cases. In January, for example, Bharara asked the U.S. District Court for Southern District of New York to dismiss his case against five men who allegedly traded on inside information about IBM Corp.'s 2009 acquisition of software concern SPSS Inc. He told the court that the government wasn't able to meet the “novel evidentiary bar” created by Newman.
Meanwhile, several lawmakers have sought to limit the impact of the decision by offering bills specifically to define insider trading.
Bharara still could seek U.S. Supreme Court review of the controversy. The move is risky, however, inasmuch as a high court ruling contrary to the government's position wouldn't be limited to the Second Circuit.
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The summary order is available at http://www.bloomberglaw.com/public/document/United_States_of_America_v_Newman_Docket_No_1301837_2d_Cir_May_10/7.
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