The Supreme Court of the United States (SCOTUS) is being asked, at the behest of U.S. Attorney Preet Bharara (Southern District of New York) to hear an insider trading case related to the 2nd Circuits ruling that overturned the convictions of Todd Newman and Anthony Chiasson. The Solicitor General filed the request last month and nearly every major news outlet had their story going on line before the defendants' lawyers even knew of it. On Monday, Newman and Chiasson filed an opposition to the government's request and you would be hard-pressed to find an article on it. Their main point was that a SCOTUS ruling would have no affect on the 2nd Circuit's ruling to toss their insider trading convictions.
The government is asking SCOTUS to define what constitutes a "benefit," as it relates to the incentive given to someone inside a publicly traded company in exchange for confidential information to someone outside the company, a tippee, who then trades on the information. The government prosecutors in New York want a very broad definition, ranging from casual friendship to bags of cash, while the defense attorneys for Newman and Chiasson want ... well they don't really care what the definition is because it does not matter to their clients! If SCOTUS takes this case, and they should NOT, their decision will not affect the ruling on Newman/Chiasson to have their convictions tossed. As Newman's attorney Stephen Fishbein wrote,"There is no decision this Court could render on the question presented that would change the result of this case.” So maybe the government would be better off taking a case to SCOTUS that would actually be meaningful to the people involved in the case. This year, SCOTUS has ruled on cases ranging from lethal injection to same-sex marriage. These are important cases where their decision directly affected the people in the case in front of them. This insider trading case is not one of those.
The Newman decision is not a ruling that has turned the justice system on its head as government prosecutors have led many to believe. It has not redefined law by making it legal to inside trade. In fact, both the Newman and Chiasson filings noted 10 other cases (civil and criminal) that have used the Newman decision as a defense argument and all of those have failed. In another case, Rengan Rajaratnam, who was prosecuted for insider trading, won his insider trading case at trial in July 2014, months before the Newman decision was released in December. In June, a Boston area man was convicted on insider trading charges and on Tuesday the feds arrested a former JP Morgan analyst for insider trading along with two of his buddies. Earlier this month, a man in Atlanta was found not-guilty on charges of insider trading. You win some, you lose some, that seems like a fair system.
The Newman case is unique and very narrow in scope. Both Newman and Chiasson were in the hedge fund industry and relied on information gathered from spreadsheets, reports and, most importantly, people. The information that landed them in the courts was derived from corporate insiders at
At trial, government prosecutors sought to tie the corporate insiders, to the analysts, to the traders (Newman and Chiasson) as part of an elaborate conspiracy. The key to their case was that the insider needed a "benefit" in order to make the disclosure illegal. That benefit was defined as "Friendship." By attempting to define “benefit” as friendship or career advice, the 2nd Circuit was seeking to give an example that would lower the bar for conviction to test whether that would tie the conspiracy together. Even in this hypothetical scenario of defining "benefit" as friendship, the 2nd Circuit said that there still was no evidence to tie the men to a crime. Prosecutors used that hypothetical use of "benefit" and acted as if there were a new definition which had somehow ruined their case. In reality, their case was weak in so many other areas, like real evidence that tied Newman and Chiasson to an actual crime ... if there even was a crime. The original tippers from inside the companies were never charged, civilly or criminally, nor were they even called as witnesses to testify. How could there be a tip that resulted in a criminal insider trading charge when the tippers, the sources, were not even a part of the case?
Last November, Justice Antonin Scalia said that he would welcome hearing an insider trading case because of his concern that the SEC and federal prosecutors were using a broad interpretation of securities laws in criminal insider trading cases. In agreeing with SCOTUS's rejection of another insider trading case involving Doug Whitman, Scalia wrote, "So I agree with the Court that we should deny the petition. But when a petition properly presenting the question comes before us, I will be receptive to granting it.” That means that the 'right' case would have been if the 2nd Circuit had upheld the convictions of Newman and Chiasson and now they were the ones appealing to SCOTUS. That case does not exist.
My sense is that Justice Scalia wanted to make a bigger statement on insider trading than clarifying a definition of "benefit."
