New SCOTUS briefs: 2nd Circuit didn’t change insider trading law in Newman case

August 27, 2015

(Reuters) – The best argument Todd Newman and Anthony Chiasson made this week in separate briefs opposing the Justice Department’s petition for U.S. Supreme Court review of a decision by the 2nd U.S. Circuit Court of Appeals that overturned their insider trading convictions is that even if the justices sided with the government, the outcome of the case wouldn’t change.

The 2nd Circuit, as you probably recall, dismissed the indictment against both men on two independent grounds. The government wants the Supreme Court to review the appellate holding that the corporate insiders who originally provided the tips prompting Newman and Chiasson’s trades didn’t receive a personal benefit in exchange for the information. But the 2nd Circuit also found, in quite emphatic language, that the government failed to prove Newman and Chiasson knew anything about whatever benefit the tipsters might have received.

So regardless of whether the 2nd Circuit improperly defined what constitutes a tipster’s personal benefit, the Newman and Chiasson briefs argue, the government’s case against them cannot survive. And because the Supreme Court only grants review of live cases, the briefs contend, it should take a pass on the Justice Department cert petition. According to Mark Pomerantz of Paul Weiss Rifkind Wharton & Garrison, who is counsel of record for Chiasson, and Newman counsel of record Stephen Fishbein of Shearman & Sterling, if the justices are really worried that the 2nd Circuit undermined precedent set by the Supreme Court in the 1983 ruling in Dirks v. Securities and Exchange Commission, they should wait for a case in which that issue will determine the outcome. “This case (is) an exceptionally poor vehicle for deciding the question presented,” the Chiasson brief said.

For Newman and Chiasson, of course, all that matters is that the Supreme Court declines to take their case and their five-year rollercoaster ride through the criminal justice system ends, which is why both of their briefs lead with the contention that the personal benefit definition won’t change the result.

But for everyone except Newman and Chiasson, their briefs’ more interesting argument is that the government has mischaracterized the 2nd Circuit’s holding – and drastically exaggerated its impact. The Justice Department’s petition for Supreme Court review claimed the 2nd Circuit narrowed the definition of a personal benefit for tipsters and created an impediment to future insider trading cases. The Newman and Chiasson filings argue that neither assertion is correct. According to them, the 2nd Circuit decision accords with Dirks precedent and rulings by other federal circuits – and has not hindered prosecutors at all.

“Actual experience has demonstrated that in every case in which a court has ruled on a Newman-based challenge to the sufficiency of a personal benefit, the government has prevailed,” the Newman brief said. “The government is proposing a conflict with Dirks based on a reading of Newman that no one else shares. This court’s decision to grant review should be based on how Newman is actually being applied by the courts, and not on the unfounded and exaggerated fears of prosecutors.”

In at least eight post-Newman decisions, federal district judges have rejected insider trading defendants’ arguments that the government failed to show a tipster received a personal benefit, according to the Newman and Chiasson briefs. Only one defendant, Thomas Conradt, managed to secure the dismissal of the criminal case against him – and the judge in that case cited both the 2nd Circuit’s definition of a personal benefit and its requirement that the defendant be aware of a benefit to the tipster.

Moreover, all of the district courts to have addressed the post-Newman personal benefit question have found the 2nd Circuit is in accord with the Supreme Court’s precedent in Dirks, according to Newman and Chiasson. Even the 9th Circuit’s recent decision in U.S. v. Salman – the ruling that supposedly creates a split between the 2nd and 9th Circuits on the definition of a personal benefit – said the 2nd Circuit “recognized that the personal benefit is broadly defined to include not only pecuniary gain but also  the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.” If the Salman case had been on appeal at the 2nd Circuit, Newman and Chiasson said, the result would have been the same as it was in the 9th: The court would have affirmed the conviction of a trader who profited from information passed between brothers because brotherhood establishes the tipster’s personal benefit.

Both briefs cited the SEC’s discussion of Newman in a February 2015 filing in a New Jersey enforcement action against a defendant named George Holley. The SEC joined the Justice Department in asking the 2nd Circuit to rehear the Newman case, yet in opposing Holley’s request to reopen his case because of the 2nd Circuit’s decision in Newman, the agency said, “Newman did not purport to distinguish or limit Dirks.” Newman and Chiasson contend the Holley brief shows that even the SEC knows the 2nd Circuit did not repudiate Dirks. (The Chiasson brief also notes that the SEC did not sign the Justice Department’s petition for Supreme Court review. Nor has the agency filed an amicus brief supporting Justice’s Supreme Court petition.)

I can’t help but end this discussion of insider trading law as I’ve ended others: with a reminder that it wouldn’t be up to the 2nd Circuit or the Supreme Court to define illegal trading if Congress would step up and write a law. The Newman brief concludes with a similar point. The Justice Department may not like the way the 2nd Circuit decided the Newman case – or, for that matter, the way the Supreme Court decided Dirks – but if it wants to expand the borders of illegal trading, the brief said, “it should take its petition not to this court, but to Congress.”

(Reporting by Alison Frankel)

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