Two cheers for Judge Barrington Parker of the U.S. Court of Appeals for the Second Circuit and his fellow panelists Ralph Winter and Peter Hall for their opinion today reversing the convictions of Todd Newman and Anthony Chiasson for insider trading and conspiracy. From the opinion:
We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons.
First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties.
Newman and Chiasson were several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information. With respect to the Dell tipping chain, the evidence established that Rob Ray of Dell's investor relations department tipped information regarding Dell's consolidated earnings numbers to Sandy Goyal, an analyst at Neuberger Berman. Goyal in turn gave the information to Diamondback analyst Jesse Tortora. Tortora in turn relayed the information to his manager Newman as well as to other analysts including Level Global analyst Spyridon "Sam" Adondakis. Adondakis then passed along the Dell information to Chiasson, making Newman and Chiasson three and four levels removed from the inside tipper, respectively.
With respect to the NVIDIA tipping chain, the evidence established that Chris Choi of NVIDIA's finance unit tipped inside information to Hyung Lim, a former executive at technology companies Broadcom Corp. and Altera Corp., whom Choi knew from church. Lim passed the information to co‐defendant Danny Kuo, an analyst at Whittier Trust. Kuo circulated the information to the group of analyst friends, including Tortora and Adondakis, who in turn gave the information to Newman and Chiasson, making Newman and Chiasson four levels removed from the inside tippers.
Two cheers are in order because the judges stood up to the overreaching prosecutor, Preet Bharara, and threw out the convictions notwithstanding that the defendants are members of an unpopular group, high-income money managers. This may also help Michael Steinberg in his appeal. I'm withholding a third cheer because the opinion defends the clarity of the current state of insider trading law, which in my view could use some legislative clarification or revision. Again, from the opinion:
Although this Court has been accused of being "somewhat Delphic" in our discussion of what is required to demonstrate tippee liability, United States v. Whitman, 904 F. Supp. 2d 363, 371 n.6 (S.D.N.Y. 2012), the Supreme Court was quite clear in Dirks.
That supposed clarity can be little reassurance to Americans who are trying to trade stock based on the best information legally available and who risk being sent to prison, or in the best case accumulating huge legal fees and reputational damage while avoiding prison on a legal appeal, on the basis not of a criminal statute but merely the Supreme Court's interpretation of that statute. Readers who are not persuaded of my view can try reading the Second Circuit opinion, along with Dirks, and then attempt to write a simple, one-or-two sentence definition of what information one is allowed to use when making investment decisions. Good luck! The opinion is good news for Messrs. Newman, Chiasson, and Steinberg, but it's also, alas, good news for all the compliance lawyers who make a living trying to make this sort of thing intelligible. They have a difficult job, because they need to bear in mind not only the Delphic opinions of the judges and justices (never mind the actual law), but also the shifting political and popular moods that produce these prosecutions as predictable responses to economic downturns.
For someone to make the case that the insider trading laws are not just vague but selectively enforced, we'll need not just a judge or a justice or a panel of them, but a politician or public figure able to explain that something's wrong when insider trading prosecutions are just the left's latest means of combating income inequality. Perhaps it'll be a cause for Messrs. Newman and Chiasson now that they have their freedom.