The WSJ reports that:
The Supreme Court on Monday turned away a closely watched Justice Department appeal seeking more leeway to bring insider-trading prosecutions, a move that ends the government’s effort to overturn a court ruling favoring Wall Street defendants.
The justices, without comment, said they wouldn’t consider the department’s challenge to a major appeals-court decision from last year overturning two insider-trading convictions of hedge-fund portfolio managers.
That ruling, from the Second U.S. Circuit Court of Appeals in New York, said it wasn’t enough for prosecutors to show that someone who received an inside tip traded on material nonpublic information about a corporation.
Instead, prosecutors also had to prove that the tip recipient knew the confidential information came from an insider, and that the insider disclosed the information for a personal benefit, the appeals court said.
SCOTUS Blog explained:
The new insider-trading case that the Court declined to review marked a significant break in a string of scores of victories by prosecutors in Manhattan against those who buy or sell stock by relying on corporate data that was not yet known to the public, including other investors. Prosecutors had won convictions of two hedge-fund portfolio managers, Todd Newman and Anthony Chiasson, who had made millions by trading in information that was passed along to them through a chain of contacts, traced back to corporate insiders for high-tech companies.
Newman, a portfolio manager at Diamondback Capital Management, made about $4 million in gains and Chiasson, a co-founder of Level Global Investors, gained about $38 million. They were convicted of criminal trading on inside information; Newman was sentenced to fifty-four months in prison and Chiasson to seventy-eight months. They were prosecuted on the basis of a “gift theory” — that is, they benefited in the market from transactions that were based on something that was handed to them indirectly.
The U.S. Court of Appeals for the Second Circuit overturned their convictions, declaring that prosecutors failed to prove that Newman and Chiasson, as “tippees,” knew when they made trades that an insider had disclosed confidential information and that the insider did so in exchange for a personal benefit. That ruling, the government argued in seeking Supreme Court review, created a difficult new legal standard that will “impair the government’s ability to protect the fairness and integrity of the securities market.”
The Justices, as is their custom, made no comment as they denied review. There were no notations that any individual Justice had dissented from the order.
I'm pleased that the Court denied cert. As we argued in a brief opposing rehearing en banc at the Second Circuit level, which I was privileged to co-sign:
The panel’s opinion in Newman is both a correct application of the personal benefit test adopted by the Supreme Court in Dirks v. SEC and an important corrective to the government’s drive to expand the limits of insider trading liability. As the Dirks court appreciated, in the economically critical area of analyst-insider communication, a liability standard that is overly broad or unclear will deter market participants from seeking quality information on which to trade and thereby damage the healthy functioning of capital markets. The Supreme Court fashioned the personal benefit test accordingly, to draw a clear line between permissible and impermissible information gathering, so that analysts and investors would know when trading was permissible and not be needlessly deterred from seeking the best information available to them.
The government now seeks to dilute the Supreme Court’s test to the point where it would become, in the Newman court’s words, “a nullity.” Newman op. at 22. Under the government’s interpretation of personal benefit, almost any non- public insider disclosure could qualify, and the recipient of information would have no way of determining when trading on that information was permitted. The government’s misreading of Dirks would fundamentally undermine the policy imperatives that led the Supreme Court to adopt the personal benefit test as an important market-protective limit on insider trading liability, and would deter valuable analyst-insider communications, to the detriment of the market and of all market participants.
For prior commentary on the Newman case, see:
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Jul 31, 2015 ... Newman, which overturned the insider trading convictions of two hedge ... Newman and the personal benefit requirement in insider trading ...
www.professorbainbridge.com/.../evaluating-the-governments-cert-petition- in-us-v-newman.html
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Aug 27, 2015 ... Moreover, all of the district courts to have addressed the post-Newmanpersonal benefit question have found the 2nd Circuit is in accord with ...
www.professorbainbridge.com/.../newman-was-no-a-game-changer.html
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