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Prosecutors may try to show that a lawyer’s tip about Pfizer Inc.'s plans to acquire King Pharmaceuticals Inc. was intended as a gift, even though that wasn’t specifically alleged in the indictment ( United States v. Klein , 2017_BL_42526, E.D.N.Y., No. 16–CR–442, 2/10/17 ).
The charges put the parties on notice of the “core of criminality” the government intended to prove, Judge Joan M. Azrack of the U.S. District Court for the Eastern District of New York said.
In December, the U.S. Supreme Court ruled in Salman v. United States that an insider giving a gift of confidential information received the “personal benefit” required to trigger insider trading liability. The court in this case is one of the first to construe the high court’s decision.
According to court documents, in August 2010, King’s lawyer Robert Schulman told his friend, investment adviser Tibor Klein, about the impending merger.
Klein allegedly traded on the information and made over $328,000 in profits for himself and his clients, including Schulman, after the tender offer was publicly announced. Subsequently, a grand jury indicted both Klein and Schulman on conspiracy to commit securities fraud and securities fraud charges.
The Securities and Exchange Commission sued Klein civilly based on the same alleged misconduct. The SEC suit was stayed pending the outcome of the parallel criminal proceeding.
In the criminal case, Schulman moved to preclude the government from pursuing a “gift theory” at trial. Under the theory, a tipper can be held liable for disclosing non-public information to another for a personal benefit, even when the information is given as a gift.
He argued that the theory wasn’t presented to the grand jury, and that allowing the prosecution to proceed under the theory would constitute “constructive amendment” of the indictment. Schulman also argued that at the time he was indicted, Second Circuit precedent required the government to show that he intended to benefit financially from sharing the inside information. Salman subsequently overturned that precedent, the court recounted.
The court found Schulman’s argument “unavailing.” It said that the core theory of the indictment remains the same irrespective of the benefit Schulman received—the attorney breached his duty not to disclose information for a personal benefit.
In other findings, the court granted the government’s motion to preclude Klein and Schulman from referencing the SEC complaint and charging decision. The documents constitute inadmissible hearsay and have limited probative value that’s substantially outweighed by the danger of unfair prejudice and confusion, Azrack said.
To contact the reporter on this story: Antoinette Gartrell in Washington at email@example.com
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