US v. Newman and the Rewriting of the Law of Insider Trading (Part 10)

With all of that background, lets jump ahead to US v. Newman, 773 F.3d 438 (2nd Cir. 2014). 

In that case, the government  brought criminal actions against Todd Newman and Anthony Chiasson for insider trading.  Both were convicted in a six week trial.   Under the alleged facts, the government asserted that a number of analysts at hedge funds obtained material non-public information (advanced knowledge of earnings) from employees at public companies (Dell and NVIDIA). In one case, the employee was the head of investor relations.  In another, the employee was someone in the "finance unit."  Neither appear to have been officers.

The non-public information was then alleged to have passed on to portfolio managers.  The government asserted that Newman and Chiasson received and used this information, earning profits of $4 million and $68 million for their funds. Both were ultimately convicted by a jury of trading on material nonpublic information. 

The panel of the Second Circuit reversed.  In setting out the test for insider trading, the held that:

  • 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 (a) disclosing confidential information to a tippee (b) 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 court found that there was insufficient evidence to demonstrate that the tippers had benefited from the tip.  As a result, all tippees were exonerated.  In addition, to the extent that there was a benefit, the court found that there was insufficient evidence to demonstrate that Newman and Chiasson were aware that it existed. 

As the court put it, both Newman and Chiasson were “several steps removed from the corporate insiders” and as a result were unaware of “the source of the inside information.”   Indeed, with respect to Dell, both Newman and Chiasson were  “three and four levels removed from the inside tipper”.  See Id. (“a tippee's knowledge of the insider's breach necessarily requires knowledge that the insider disclosed confidential information in exchange for personal benefit.”). 

With respect to Newman, the decision and the request for rehearing en banc is posted, along with the SEC’s amicus brief, at the DU Corporate Governance web site.  The amicus filed by a small group of law professors that supports the decision is here.  

J Robert Brown Jr.