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Oct. 19 — Fresh from their victory in the U.S. Supreme Court, former hedge fund executives Todd Newman and Anthony Chiasson are off the hook in a Securities and Exchange Commission civil insider trading action.
In a letter to Judge Shira Scheindlin, U.S. District Court for Southern District of New York, the commission said that “[i]n light of the particular circumstances of this matter,” it wouldn't oppose the defendants' dismissal motion.
However, the commission added, its move shouldn't be construed to “indicate agreement” with the arguments in the defendants' legal memorandum.
Late last year, in United States v. Newman, the U.S. Court of Appeals for the Second Circuit threw out the defendants' convictions for misusing confidential information about two technology companies. In a major setback to securities enforcers, 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. On the first day of its 2015-2016 term, the high court rejected a certiorari petition by U.S. Solicitor General Donald Verrilli to review the appeals court's decision. The rebuff was a blow to U.S. Attorney Preet Bharara, who racked up more than 80 convictions during a six-year offensive against Wall Street insider trading.
In the wake of the high court's move, Newman and Chiasson argued to the district court that the higher standard of proof required under the appeals court ruling for criminal cases also applied to civil enforcement actions. They contended that the personal benefits received by the insiders who allegedly provided tips about Dell Inc. and Nvidia Corp. weren't "sufficiently consequential" to support insider trading liability. Shortly thereafter, the commission said it wouldn't oppose the motion.
The SEC's decision not to pursue the allegations may afford new hope for other insider trading defendants in both civil and criminal actions. One such defendant is SAC Capital Advisors LP's Michael Steinberg, who is seeking to reverse his own conviction based on the Second Circuit's decision. His appeals brief is due Oct. 26.
Asked about the implications of the commission's action, Chiasson's lawyer Gregory Morvillo, Morvillo LLP, said he doesn't think the SEC’s letter can be read as a “sweeping institutional posture” towards Newman. Rather, he said in an e-mail to Bloomberg BNA, the move reflects the agency's “acknowledgment” that in this particular case it can't satisfy the elements of the offense.
“What it means for future enforcement cases is that the SEC will need to develop facts that it can use to prove each and every element of insider trading, as articulated in Newman, or not bring a case at all,” Morvillo said.
Georgetown University law professor Donald Langevoort offered a similar perspective. In an email to Bloomberg BNA, he suggested that both the SEC and the Justice Department “will be looking harder at both personal benefit and tippee awareness to find evidence responsive to what the courts are asking for.” He pointed out that some district court cases have allowed claims to go forward because there is enough evidence of a tangible benefit. “[A]s the law evolves over time, the staff will learn to plead its cases so as to pass muster,” Langevoort predicted.
The SEC didn't respond to an e-mailed request for comment.
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To see the SEC's letter, go to http://www.bloomberglaw.com/public/document/Securities_and_Exchange_Commission_v_Adondakis_et_al_Docket_No_11.
To see the defendants' summary judgment motion, go to http://www.bloomberglaw.com/public/document/Securities_and_Exchange_Commission_v_Adondakis_et_al_Docket_No_11/1.
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