Second Circuit to Preet Bharara: Quit Using “Doctrinal Novelty” to Prosecute Insider Trading Cases

The Second Circuit today issued a landmark decision reversing the convictions of the defendants in United States v. Newman, an insider trading case.

It held that the government has to prove that the defendant knew that the tipper of inside information was providing confidential information in exchange for some personal benefit.

During the trial of Anthony Chiasson and Todd Newman, the trial judge refused to instruct the jury that the government had to prove this element. The Second Circuit unanimously rejected that view.

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.

The court went on to reject the government’s argument:

We find no support for the government’s contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability. . . . Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.

The personal benefit must be something more than mere friendship. The benefit must be a

meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature

The Second Circuit also offered a backhanded slap at recent SDNY insider trading prosecutions, saying that they were increasingly based on a “doctrinal novelty”–and aimed at tippees who were “many levels removed from corporate insiders.”

Generally, the more the government has to prove, the better for defendants. And the more knowledge or intent the government has to prove, the better for defendants.

By requiring this level of knowledge, the Second Circuit effectively prevents most insider trader cases against individuals who are remote to the tipper and not the direct recipient of the leaked information. It’s still possible to bring that kind of attenuated case, but it will be much harder to prove. (In this case, the court explained that neither Mr. Chiasson nor Mr. Newman knew the identity of the tippers.)

DealBook has a great article about the implications of this decision on pending SDNY insider trading cases. It calls the decision the start of a possible “unraveling” of Preet Bharara’s campaign to win insider trading cases at any cost.

I’ve written previously about this case; this is a particularly gratifying follow-up post.

Notably, the NACDL filed an amicus brief in support of the defendants.

Congratulations to all!

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