There was a very interesting exchange of letters this week at the 2nd Circuit Court of Appeals, where former Diamondback Capital portfolio manager Todd Newman and his co-defendant, Level Global Investors co-founder Anthony Chiasson, are appealing their December 2012 convictions for insider trading in Dell and Nvidia stock. And after the 2nd Circuit Court addresses the issue highlighted in the letters, not only the Newman and Chiasson convictions but also the guilty verdict against SAC Capital portfolio manager Michael Steinberg and the government’s prosecution of Raj Rajaratnam’s brother Rengan could be imperiled.
Lawyers representing Newman and Chiasson – Stephen Fishbein of Shearman & Sterling for Newman and Mark Pomerantz of Paul, Weiss, Rifkind, Wharton & Garrison for Chiasson – contend that the jury’s guilty verdicts should be overturned because the judge in the case, U.S. District Judge Richard Sullivan of Manhattan, made a fatal mistake in his instructions to the jury. Sullivan decided not to instruct jurors that the government must prove Newman and Chiasson were aware that Dell and Nvidia insiders stood to gain from passing along non-public information. Instead, he told the jury that it could find the defendants guilty as long as prosecutors proved the defendants knew they were trading on information the insiders disclosed in breach of their duty of confidentiality.
Newman and Chiasson argue that Sullivan’s jury instruction is contrary to the law of insider trading. As Fishbein explained in Newman’s appellate reply brief, the defendants believe that two U.S. Supreme Court decisions, Dirks v. Securities and Exchange Commission in 1983 and Bateman Eichler v. Berner in 1985, stand for the proposition that if the recipients of insider information don’t know that the original tipster stands to benefit from disclosing the tips, then no crime has been committed.
Newman and Chiasson were so-called remote tippees, which means that they had no direct ties to the Dell and Nvidia insiders who first passed along information about the companies. At trial, their defense lawyers asked Judge Sullivan to instruct the jury that to reach a guilty verdict, jurors had to find that Newman and Chiasson knew the tipsters had disclosed inside information in exchange for personal benefits, citing the Supreme Court’s Dirks decision. The government argued that under the 2nd Circuit’s 2012 decision in a Securities and Exchange Commission enforcement action against Wynnefield Capital’s Nelson Obus and several co-defendants, it only had to show that Newman and Chiasson knew they were trading on non-public information that insiders had disclosed in breach of their duty of confidentiality.
Faced with similar arguments in the prosecution of Doug Whitman of Whitman Capital, U.S. District Judge Jed Rakoff held in November 2012 that remote tippees “must have a general understanding that the inside information was obtained from an insider who breached a duty of confidentiality in exchange for some personal benefit.” But Judge Sullivan sided with the government and instructed jurors that they could convict Newman and Chiasson if they found the defendants traded on inside information disclosed in a breach of the insiders’ duty of confidentiality.