‘Newman' Topples Insider Charges Against Defendants in IBM Merger Case

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By Phyllis Diamond

Jan. 29 — U.S. Attorney Preet Bharara Jan. 28 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.

In a letter to Judge Andrew Carter, Bharara said the U.S. Court of Appeals for the Second Circuit's recent decision in United States v. Newman “creates a novel evidentiary bar for tipper benefit and tippee knowledge of such a benefit, that the Government cannot now meet.”

In Newman, the appeals court vacated the insider trading convictions of two former hedge fund executives, saying the government didn't prove beyond a reasonable doubt that the two men—both downstream tippees—knew the information was disclosed by an insider in exchange for a personal benefit.

Backed by the Securities and Exchange Commission, Bharara has asked the court to reconsider its ruling. However, the decision already has had repercussions for several other insider trading prosecutions.

IBM Prosecution

In this case, a lawyer working on the IBM deal shared details about the acquisition with his friend, defendant Trent Martin. Martin, in turn, allegedly told his roommate, defendant Thomas Conradt, who in turn shared the tip with defendants Daryl Payton, Benjamin Durant and David Weishaus.

Four of the men later pleaded guilty to criminal insider trading charges. However, on Jan. 22, the court threw out the guilty pleas based on the Newman decision and the case against Durant was put on hold.

In his Jan. 28 letter, Bharara asked Carter to dismiss the indictments. He told the court that much of the prosecution's evidence regarding the tipper's benefit and the tippees' knowledge thereof would have been offered through the testimony of cooperating witnesses Martin, Conradt and Weishaus, whose guilty pleas since have been vacated. “And what remains of the Government's evidence on these key issues falls short of Newman's newly-imposed legal requirements, rendering moot the need for an additional factual proffer in the form of an affidavit.”

Ability to Appeal

Under the circumstances, Bharara said, the court should dismiss the indictments—both because the court has enough information to do so and because it would preserve the government's ability to appeal the dismissal in light of its pending petition for rehearing in Newman.

However, he wrote, if the court doesn't grant the defendants' dismissal motions, the government intends to move for dismissal without prejudice of the charges against all five defendants.

To contact the reporter on this story: Phyllis Diamond at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com


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