NEW YORK, N.Y. – A federal appeals court dealt a blow to the government’s success in insider trading prosecutions Wednesday by reversing two convictions with a decision that also jeopardizes a third — and attempts to further define how far prosecutors can push the law in their quest to clean up Wall Street.
The 2nd U.S. Circuit Court of Appeals overturned the convictions of Anthony Chiasson, of New York, and Todd Newman, of Needham, Massachusetts, finding they were too far removed from inside information to be prosecuted.
In doing so, the three-judge panel criticized the government for a blitz of Manhattan insider trading prosecutions that resulted in over 80 convictions since 2008, citing the “novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.” The court said prior cases generally involved tippees directly participating in the passing of secrets.
“We note that the government has not cited, nor have we found, a single case in which tippees as remote as Newman and Chiasson have been held criminally liable for insider trading,” Circuit Judge Barrington D. Parker wrote in the majority opinion.
In a statement, U.S. Attorney Preet Bharara said the court’s ruling “interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information.”
He noted it affected only a subset of recent insider trading prosecutions, although it “appears in our view to narrow what has constituted illegal insider trading.” He said he would consider appealing.
Chiasson co-founded Greenwich, Connecticut-based Level Global Investors. He was sentenced to 6 1/2 years in prison and ordered to pay a $5 million fine and forfeit $1.38 million.
Newman worked for Stamford, Connecticut-based Diamondback Capital Management. He received 4 1/2 years, was fined $1 million and ordered to forfeit $737,724. The former portfolio managers were both convicted in December 2012.
The appeals court said the government failed to present sufficient evidence the men wilfully engaged in insider trading or conspired to break the law. It instructed a lower court judge to dismiss the indictments against them.
The reversals could jeopardize the insider trading conviction of former SAC Capital portfolio manager Michael Steinberg, which is being challenged on the same principle.
Gregory Morvillo, a Chiasson attorney, called the ruling “a resounding victory for the rule of law and for Anthony Chiasson personally.”
“He is deeply gratified that the decision issued today unequivocally re-establishes his innocence under the law — consistent with what Anthony has steadfastly maintained for the duration of this ordeal,” he said.
Stephen Fishbein and John Nathanson, lawyers for Newman, said in a statement they were “relieved but not surprised by today’s decision, which clearly establishes Todd Newman’s innocence on all charges.”
“This is not a mere technicality, but rather a considered judgment that Mr. Newman did not commit a crime,” they added. “Unfortunately, this vindication comes after four years of unnecessary prosecution including a trial in which the 2nd Circuit held that the wrong legal standard was applied. We are gratified that, going forward, others will benefit from clearer rules in this area.”
Barry Berke, Steinberg’s attorney, said in a statement the ruling “clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well. It sends a loud and clear message that the government will be rebuked when it tries to turn innocent conduct into a crime, as it did in the case of Mr. Steinberg.”
Eugene Goldman, a former Securities and Exchange Commission enforcement lawyer, said the ruling “could stop multiple insider trading cases in their tracks.”