September 25, 2022

Volume XII, Number 268

Advertisement

September 23, 2022

Subscribe to Latest Legal News and Analysis

September 22, 2022

Subscribe to Latest Legal News and Analysis

Second Circuit Clarifies a Heightened Standard for Insider Trading Convictions

The US Court of Appeals for the Second Circuit recently held that, in order to convict a tippee for insider trading under Section 10(b) of the Securities Act of 1934 and Rule 10b-5, the government must prove beyond a reasonable doubt that the tippee had knowledge of the benefit received by the tipper who breached his or her duty of confidentiality.

Todd Newman and Anthony Chiasson were convicted in May 2013 of insider trading in the US District Court for the Southern District of New York. Newman and Chiasson both received tips from other financial analysts, as well as each other. In 2008, Newman and Chiasson learned of Dell’s and NVIDIA’s upcoming earnings announcements but were far removed from the original insiders. Newman and Chiasson executed trades earning approximately $72 million from trading based on the tips. At trial, the jury was instructed that, in order to convict, it must find that the tippees (Newman and Chiasson) knew that the information was originally disclosed by an insider in breach of a duty of confidentiality, but the jury instruction was silent in regard to whether the defendants must have had knowledge of the original tipper’s personal benefit. 

The Second Circuit held that knowledge of the tipper’s personal benefit is an essential element of insider trading. The government argued that it need only show that the tippee had knowledge of the breach of the duty of confidentiality, not of the personal benefit received in return. The court rejected this argument, criticizing the government for “overreliance on our prior dicta,” and concluding that, for the purpose of insider trading, the insider must have breached a duty of confidentiality in return for a personal benefit, and therefore the tippee’s knowledge of the breach must also include knowledge of the benefit.  

Based on its holding, the court overturned the convictions of Newman and Chiasson. First, the court determined that the omission of knowledge of the tipper’s personal benefit from the jury instruction was not harmless error, as Newman and Chiasson both contested that they had any such knowledge. Second, the court determined that there was insufficient evidence of any personal benefit to the original tippers from Dell and NVIDIA. Third, the court emphasized that it cannot be inferred that Newman and Chiasson knew that the data must have been obtained through breach of the duty of confidentiality for personal benefit, as the record demonstrated the industry custom of leaking earnings results and assisting analysts with their methodology. 

In overturning the convictions, the Second Circuit noted: “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.”

United States v. Newman, Nos. 13-1837-cr (L), 13-1917-cr (con) (2d Cir. December 10, 2014).

©2022 Katten Muchin Rosenman LLPNational Law Review, Volume IV, Number 346
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Michael Rosensaft, white collar criminal litigator, Katten, New York Law Firm
Partner

Michael M. Rosensaft focuses his litigation practice on representing individuals and businesses in white collar criminal matters, regulatory enforcement matters, corporate internal investigations, insurance and health care fraud and complex civil litigation.

Prior to joining Katten, he served as an Assistant US Attorney for the Southern District of New York. In that capacity, Michael oversaw the investigation and prosecution of numerous criminal cases involving terrorism, international money laundering, export violations, bribery of foreign...

212-940-6631
Tenley Mochizuki, Katten Muchin Law Firm, Litigation Lawyer
Associate

Tenley Mochizuki concentrates her practice in litigation and dispute resolution matters.

While attending law school, Tenley participated in the Advocacy for the Elderly Clinic and worked on the Virginia Environmental Law Journal. Before joining the firm, she worked in a medical office, a primate cognition laboratory and various nonprofit organizations.

212-940-8568
Advertisement
Advertisement
Advertisement