The Continuing Fall-Out From The Second Circuit’s Insider Trading Decision In Newman

Last week, a New York federal judge struck another blow to prosecutorial efforts to secure insider trading convictions in tipper-tippee cases. As discussed in detail here, the U.S. Attorney's Office for the Southern District of New York suffered a high-profile defeat in an insider trading case last month, when the Second Circuit issued its decision in U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014). In Newman, the Second Circuit found that prosecutors in tipper-tippee cases must prove both that the tipper (the individual disclosing inside information in breach of a duty) received a personal benefit in exchange for the disclosure, and that the tippee (the individual receiving and trading on the information) knew about the tipper's receipt of that benefit. In the wake of Newman, U.S. Attorney Preet Bharara and others expressed concerns that the decision could limit future insider trading prosecutions.

It is now clear that those concerns were warranted. Last month, Judge Andrew Carter of the Southern District of New York indicated that, based on Newman, he intended to vacate the recent guilty pleas of four insider trading defendants in U.S. v. Durant, et al., No. 12-cr-887 (S.D.N.Y.). The government requested an opportunity to submit briefing demonstrating both that Newman does not control the outcome in Durant and that the pleas were legally sufficient. The government's brief was filed on January 12.

The government argued in its brief that, while both are tipper-tippee cases, Newman and Durant concern different underlying theories of insider trading. Newman involved the "classical" theory, meaning that the tipper was a corporate insider who obtained material, nonpublic information by virtue of his position within his company, and in disclosing that information, he breached fiduciary duties to the company and its shareholders. Durant, however, was prosecuted under the "misappropriation" theory of insider trading. This theory applies where the tipper is not a corporate insider, but lawfully comes to possess material, nonpublic information, and in disclosing the information, breaches a duty of trust or confidence to the source of the information.

By way of background, in Durant, the defendants purchased stock in and call options on a company that was in the process of being acquired. One of the defendants allegedly received nonpublic information about the acquisition from a friend, a lawyer working on the transaction...