U.S. Challenges Landmark Decision on Insider Trading as ‘Dramatically’ Wrong

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By Patricia Hurtado

Jan. 13 — A federal appeals court ruling that makes it harder to obtain insider trading convictions was called “dramatically” wrong in the U.S. government's first written response to the landmark decision.

The Jan. 12 criticism was made in a separate case and may indicate prosecutors' intentions to challenge the Dec. 11 decision before the full U.S. Court of Appeals for the Second Circuit.

In the Dec. 10 Second Circuit ruling that tossed the convictions of two fund managers, the court said that to be found guilty of insider trading, defendants must know their tips came from someone who not only had a duty to keep it secret, but also received a personal benefit for leaking it.

The conviction of former SAC Capital Advisors fund manager Michael Steinberg is also at risk of being overturned under the decision's interpretation.

The ruling “dramatically (and in our view, wrongly) departs from thirty years of controlling Supreme Court authority and, in so doing, legalizes manipulative and deceptive conduct that no court has ever sanctioned,” prosecutors said in the Jan. 12 court filing.

The December appeals court ruling was a setback for U.S. Attorney Preet Bharara, who has won convictions against more than 85 people in such cases.The decision in the cases of fund managers Todd Newman and Anthony Chiasson may also imperil the cases of six men who pleaded guilty and agreed to cooperate with the government.

Appeals Deadline Looms

The U.S. has until Jan. 23 to tell the appeals court whether it will ask for a re-hearing from the entire panel of the Second Circuit. If it fails at the full circuit level, the government might seek review by the U.S. Supreme Court. The Jan. 12 filing may signal the government's stance on Newman and Chiasson.

The government's response came in a case against four men who admitted trading on tips about IBM Corp.'s $1.2 billion purchase of the software company SPSS Inc. The information originated with a lawyer working on the deal.

The appeals court's decision “wrongly narrows” who can be criminally prosecuted for obtaining nonpublic information from a company insider, according to the Jan. 12 filing by assistant U.S. attorneys Jessica Masella and Andrew Bauer.

They said the adverse ruling shouldn't affect the IBM case because the four men admitted “misappropriating” or stealing the information. The government shouldn't have to show any personal benefit was traded for it, the prosecutors said.

Trial Judge Flagged Pleas

The judge presiding over the IBM case told the men he might cancel their pleas because of the appeals court's insider decision. The judge also delayed till next month the start of a trial for a fifth man who pleaded not guilty.

Four of the five worked together as stockbrokers, and one of them obtained the inside information from the lawyer working on the deal. The five made more than $1 million from the tip, according to the government.

To contact the reporter on this story: Patricia Hurtado in Manhattan at pathurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

The brief is available at http://www.bloomberglaw.com/public/document/USA_v_Conradt_et_al_Docket_No_112cr00887_SDNY_Nov_28_2012_Court_D/6.

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