The SEC Finally Surrenders in Insider Trading Case

3D red dice with win text on all sides

The SEC finally gave up the ship in its insider trading case against former hedge fund managers Anthony Chiasson and Todd Newman.

After the Second Circuit reversed their convictions and the Supreme Court denied cert, the SEC decided not to pursue its civil suit against the two men.

Took it long enough.

The Criminal Case in the Second Circuit

The government filed a criminal complaint against Mr. Newman and Mr. Chiasson on January 17, 2012. The SEC filed suit against them the next day. The two cases were based on the same set of facts.

The jury in the criminal case found the two men guilty on all counts in December 2012, and they appealed. Well known to readers of this blog, the Second Circuit reversed the convictions in December 2014. Here’s the key holding:

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.

Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive.

Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.

Since the Newman decision, some courts have disagreed as to when evidence of a non-tangible benefit satisfy the “personal benefit” requirement. Some courts have declined to read Newman too broadly, even if they generally agree with the conclusion that the government must prove some personal benefit to the insider who shared confidential information.

This strikes me as a question that won’t go away. It’s a classic fact question, one that must be decided by a jury.

The government first sought en banc review of the Second Circuit decision, which was denied.

The Supreme Court Denies Cert

The government was not ready to give up on the case. It filed a petition for certiorari, seeking to have the Second Circuit’s decision reversed.

On October 5, 2015, the first day of the new term, the Supreme Court denied cert. There was no explanation for the denial.

What Happened in the SEC Case?

After Mr. Newman and Mr. Chiasson were convicted, the court in the SEC case entered partial summary judgment against them. After the Second Circuit decision, however, the partial summary judgment was reversed. The court then stayed the case pending the rest of the appeal.

After the Supreme Court denied cert, the district court ordered Mr. Newman and Mr. Chiasson to file a motion for summary judgment. They did so on October 13, 2015.  The key part of their motion reads:

As an initial matter, this Court should grant the Motion because the Complaint does not allege that the Defendants knew of any benefit to the insiders. In other words, the Complaint does not address a necessary element, and the Court should dismiss this case.

Even were the Complaint’s allegations sufficient, however, the Defendants are entitled to summary judgment because the Second Circuit — again, after reviewing the extensive trial record in the parallel criminal case — found that “the Government presented absolutely no testimony or any other evidence that Newman and Chiasson knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures, or even that Newman and Chiasson consciously avoided learning of these facts.” Id. at 453.

In these circumstances, there is no basis on which the SEC could prevail here.

The SEC apparently agreed that there was no basis on which it could prevail.

On October 16, 2015, the SEC filed a short letter with the court:

It light of the particular circumstances of this matter, the Commission does not oppose the Defendants’ motion. We note, however, that our position on the instant motion should not be construed to indicate agreement with all of the arguments contained in the Defendants’ memorandum of law.

So, for Mr. Newman and Mr. Chiasson, the long road is finally over. They prevailed in their criminal case and in the parallel SEC case. We can only imagine what they’ve been through in the nearly four years since they were indicted, however.

It’s not often that we see the SEC just give up. It could have gone forward with the case, counting on a lower standard of proof to win on the fact questions. But that would have risked a very high profile loss, one that the SEC can’t afford to face.

From the SEC’s letter and the DOJ’s petition for certioriari, it’s clear that other defendants will be put through the same ringer. They still think the standard for an insider trading conviction is low.

That’s an aggressive position, particularly since the Second Circuit is viewed as quite persuasive authority in securities cases. The Newman decision was not a great leap in the case law, and it should be the law of the land. The government apparently wants to make sure it’s not.

Update 10/22/15: As expected, Judge Shira Sheindlin dismissed the case against Mr. Newman and Mr. Chiasson. Game over.

This entry was posted in Appeal, Insider Trading, SEC Investigation and tagged . Bookmark the permalink.

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