Award Winning Attorneys
SEC Whistleblower Program
News & Insights
n recent years, one of the top priorities for the SEC and the Department of Justice, which prosecutes criminal violations of the federal securities laws, has been cracking down on insider trading, particularly by hedge funds that use confidential information to gain an investing edge. As many recent cases – including the successful prosecution of SAC trader Matthew Maratoma – reflect, such insider trading is frequently undertaken by a so-called “tippee,” an outsider who has received material non-public information from a company insider. Now, an important case pending before the Second Circuit Court of Appeals, United States v. Newman, will help define what the SEC and the DOJ must prove to establish the liability of the “tippee” and, in so doing, affect how future insider trading cases are prosecuted by both agencies.
The case involves two hedge fund managers, Todd Newman and Anthony Chiasson, who were convicted of trading on information about the financial performance of several public technology companies before that information was made public. These tips came to Newman and Chiasson on a third-hand basis: a jury found that employees of the technology companies passed the inside information onto outside acquaintances, who in turn passed it onto analysts working for Newman and Chiasson’s respective hedge funds, who in turn passed it on to Newman and Chiasson. The jury found that Newman and Chiasson traded on this material non-public information while knowing that it had been disclosed by the company insiders in violation of those insiders’ duty to keep it confidential (in other words, Newman and Chiasson knew the information had been wrongfully disclosed). The question before the Second Circuit is whether the DOJ was also required to prove beyond a reasonable doubt that the defendants knew that the company insiders had received a personal benefit for sharing the non-public information.
In briefs submitted to the court, the DOJ has made a persuasive legal argument that Newman and Chiasson’s convictions should be upheld because prior decisions by both the Second Circuit and the Supreme Court have not required prosecutors to prove that “tippees” had knowledge of such an improper benefit. But, perhaps the most compelling argument put forth by the DOJ is a common-sense one: “Trading securities based on information a defendants knows to be not only material and nonpublic, but also to have been disclosed by a company insider in violation a duty to keep the information confidential is plainly wrongful conduct.” In other words, defendants in this scenario have every reason to understand that they were breaking the law.
The DOJ’s position seems to be supported both by fairness and logic. After all, a primary purpose of the securities laws, like nearly all other laws, is to deter future wrongdoing by defining the bounds of acceptable conduct: surely we want to deter trading on non-public material information where a party knows that the confidential information was wrongfully obtained and that he or she is not supposed to have it, even if the party is not aware of the specific personal benefit that the insider gained from disclosing the information. We’re hopeful that the Second Circuit will see it the same way, empowering the SEC and DOJ to continue their important crackdown on insider trading.