Law School Case Brief
United States v. Newman - 773 F.3d 438 (2d Cir. 2014)
To sustain an insider trading conviction against a tippee, the government must prove each of the following elements beyond a reasonable doubt: that (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by disclosing confidential information to a tippee in exchange for a personal benefit; (3) the tippee knew of the tipper's breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.
The Government alleged that a cohort of analysts at various hedge funds and investment firms obtained material, nonpublic information from employees of publicly traded technology companies, shared it amongst themselves, and subsequently passed this information to the portfolio managers at their respective companies. The Government charged Newman, a portfolio manager at Diamondback Capital Management, LLC (Diamondback), and Chiasson, a portfolio manager at Level Global Investors, L.P. (Level Global), with willfully participating in this insider trading scheme by trading in securities based on the inside information illicitly obtained by this group of analysts. After a six-week trial, Newman and Chiasson were found guilty of securities fraud. On appeal, Newman and Chiasson challenged the sufficiency of the evidence as to several elements of the offense, and further argued that the district court erred in failing to instruct the jury that it must find that a tippee knew that the insider disclosed confidential information in exchange for a personal benefit.
Did the district court err in failing to instruct the jury that it must find that a tippee knew that the insider disclosed confidential information in exchange for a personal benefit?
The Court agreed that the jury instruction was erroneous because it concluded 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, it held 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 it 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. Thus, the Court reversed the convictions of Newman and Chiasson on all counts and remanded with instructions to dismiss the indictment as it pertains to them with prejudice.
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