United States v. Newman

773 F.3d 438 (2d Cir. 2014)

 

RULE:

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. 

FACTS:

Defendants-appellants Todd Newman and Anthony Chiasson appeal from judgments of conviction entered on May 9, 2013, and May 14, 2013, respectively in the United States District Court for the Southern District of New York (Richard J. SullivanJ.) following a six-week jury trial on charges of securities fraud in violation of sections 10(b) and 32 of the Securities Exchange Act of 1934 (the "1934 Act"), 48 Stat. 891, 904 (codified as amended at 15 U.S.C. §§ 78j(b)78ff), Securities and Exchange Commission (SEC) Rules 10b-5 and 10b5-2 (codified at 17 C.F.R. §§ 240.10b-5240.10b5-2), and 18 U.S.C. § 2, and conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. 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 each other, 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. On appeal, Newman and Chiasson challenge the sufficiency of the evidence as to several elements of the offense, and further argue 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.

ISSUE:

Was there sufficient evidence to convict the investment portfolio managers of insider trading?

ANSWER:

No.

CONCLUSION:

Convictions reversed and case remanded with instructions to dismiss the indictment. The evidence was insufficient to convict investment portfolio managers of insider trading since there was no showing that the alleged insiders derived any personal benefit from disclosing nonpublic information which was subsequently disclosed to the managers to establish liability of the insiders as a prerequisite to liability of the managers; There was also no showing that the managers knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties since the information was of a nature regularly and accurately predicted by analyst modeling, and the managers were several levels removed from the source.

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