On December 10, 2014, in a 28-page decision that could rewrite insider trading law, the United States Court of Appeals for the Second Circuit in Manhattan overturned the convictions of two hedge fund managers who were found guilty of insider trading after a six‐week jury trial in 2012. Hedge fund managers, Todd Newman and Anthony Chiasson, had both been convicted of trading on insider information in relation to Dell and Nvidia, however, the Second Circuit tossed out both cases citing the trial judge’s “erroneous” instruction to jurors and, in a rare turn of events, the Court not only overturned the convictions but dismissed the cases with prejudice on the basis of “insufficient evidence to support the convictions.”
According to the opinion, Manhattan U.S. Attorney Preet Bharara charged Newman, a portfolio manager at Diamondback Capital Management, LLC, and Chiasson, a portfolio manager at Level Global Investors, L.P., with willfully participating in this insider trading scheme by trading in securities based on the inside information illicitly obtained by a group of analysts. At trial, the Government attempted to present evidence that a group of financial analysts exchanged information they obtained from company insiders, both directly and indirectly. Specifically, the Government alleged that these analysts received information from insiders at Dell and NVIDIA companies’ earnings numbers before they were publicly released in Dell’s May 2008 and August 2008 earnings announcements and NVIDIA’s May 2008 earnings announcement. These analysts then passed the inside information to their portfolio managers, including Newman and Chiasson, who, in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.
After losing at trial, Newman and Chiasson appealed, challenging the sufficiency of the evidence against them and that the district court erred in failing to properly instruct the jury on the legal standard for insider trading. The Second Circuit agreed with Newman and Chiasson that the jury instructions were erroneous because, as stated by the Court, “…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.” The Court went on to say that the Government did not establish sufficient evidence that any personal benefit was received by the alleged insiders and that the evidence presented was not sufficient to show that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insider’ fiduciary duties. According to the Court, 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 and thus, the Court held that there was insufficient evidence to present to the jury let alone convict Newman and Chiasson of insider trading.
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