Major Reversal Of Insider Trading Convictions After Trial: Second Circuit Sets High Bar For Tippee Liability

The United States Court of Appeals today reversed the convictions for insider trading of Todd Newman and Anthony Chiasson.1 The Court held that the government was required to prove, but did not, that the defendants knew that the insider who disclosed the confidential information did so in exchange for a personal benefit. The district court did not instruct the jury that this was an element of insider trading, and the government introduced insufficient evidence on this point (as well as on the issue of whether the insider received a personal benefit). As a result, the convictions are reversed and the indictments are dismissed.2 This is a major reversal for the U.S. Attorney's Office for the Southern District of New York, and it clarifies a rule of law that will make prosecution of remote tippees more difficult than it had been before.

At trial, the government presented evidence that financial analysts received inside information from employees at Dell and NVIDIA about upcoming earnings announcements. The analysts passed the information along to the defendants, who were portfolio managers at hedge funds. The defendants then executed trades that earned a total of $72 million in profits for their hedge funds. There was no evidence that the defendants were aware of the source of the inside information, and the Court of Appeals found that the defendants were three or four levels removed from the insiders who originally breached their fiduciary duties by disclosing the information.3 The Court suggested that this and other recent insider trading prosecutions were novel; it knew of no case in which "a tippee as remote as the defendants had been held criminally liable."4

Defendants asked the district court to grant a motion for acquittal pursuant to Rule 29 in the absence of any evidence that the defendants knew that the insiders had received a personal benefit in exchange for the inside information. In the alternative, they asked the district court to charge the jury that the defendants could be convicted of insider trading only if they knew that the insiders had received a personal benefit in exchange for the inside information. Absent such knowledge, they contended that they were not participants in the tippers' breaches of fiduciary duty to Dell and NVIDIA.5

The district court declined to grant the Rule 29 motion or to give the jury charge requested by the defendants. Instead, the district court charged that the jury needed to find only that (i)...