Aug. 31 — The argument most likely to persuade the U.S. Supreme Court not to review the Second Circuit's controversial Newman decision on criminal insider trading liability is that the case “turns on a factual inference in circumstances where the mental state standard–scienter–is a rigorous one,” Georgetown University law professor Donald Langevoort told Bloomberg BNA.
He noted that according to the Second Circuit, “there wasn’t a compelling enough showing of any appreciation of deliberate wrongdoing on the part of the tippers.”
“In other words,” Langevoort said in a Sept. 1 e-mail, “the case involves the kind of speculation courts have long been wary of in insider trading actions.”
“If this becomes simply a case about the facts,” given that the appeals court overturned the defendants' convictions, the high court “would probably be less inclined to take it.”
In United States v. Newman, , the U.S. Court of Appeals for the Second Circuit vacated the convictions of former hedge fund portfolio managers Todd Newman and Anthony Chiasson. It said the government didn't prove beyond a reasonable doubt that the defendants—both downstream tippees—knew that information was disclosed by an insider in exchange for a personal benefit.
In late July, U.S. Solicitor General Donald Verrilli asked the high court to review the Second Circuit's ruling. He argued that the appeals court broke with the high court's decision” in Dirks v. SEC, 463 U.S. 646 (1983) regarding what it means when an insider “personally benefits” by providing confidential information to a trading friend or relative.
They argued that even if the high court were to agree with federal prosecutors regarding the receipt of a “personal benefit” for insider trading purposes, it wouldn't change the outcome.
They reasoned that in seeking high court review, the government addressed only the evidence needed to show a personal benefit. The cert petition didn't raise a second, independent basis for the appeals court's ruling—the prosecution's failure to show that the defendants knew of the benefit.
“Enough is enough,” Chiasson told the justices. He said the government's “protean prosecution” of the case has devastated his business and imposed a heavy toll on him and his family. “This Court's review would prolong this ordeal for no reason.”
In other arguments, he said the question presented doesn't meet any of the criteria for Supreme Court review, such as a split among the circuits. High court review also would require “a fact-intensive inquiry into the sufficiency of the evidence—something the Government routinely counsels this Court to avoid.”
Chiasson also took issue with the government's argument that the Second Circuit's decision “threatens to disrupt the securities markets.”
“To the contrary, the real threat to market stability is the possibility of a grant of certiorari in this case.”
Newman, too, argued that no high court decision on the “narrow issue presented for review would change the ultimate disposition of this case”—reason enough to deny the government's petition. “But there are other compelling reasons as well,” he contended.
First, Newman wrote, the Second Circuit's decision is consistent with Dirks because it also “limits the inference of a personal benefit” to cases in which the tipper “can reasonably be expected to have intended to make a gift of the equivalent of cash to the tippee.”
Not only is there no circuit split, he added, the government “greatly overstates Newman's impact on the ability of law enforcement agencies to pursue traditional insider trading cases.”
Newman was represented by Stephen R. Fishbein, John A. Nathanson and Brian Calandra, Shearman & Sterling LLP, New York. Chiasson was represented by Mark F. Pomerantz, Paul Weiss Rifkind Wharton & Garrison LLP, New York; and Gregory Morvillo, Morvillo LLP, New York.
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