MANHATTAN (CN) - The 2nd Circuit freed two hedge-fund managers of insider-trading convictions today, in a decision that could require the Supreme Court to determine prosecutorial burden of proof in future securities-fraud cases.
Anthony Chiasson, who co-founded the hedge fund Level Global Investors, and Todd Newman, an ex-portfolio manager of Diamondback Capital Management, were convicted two years ago of committing securities fraud.
During a six-week trial, prosecutors cast the men as "part of a criminal club of portfolio managers and analysts" who netted $68 million and $4 million, respectively, on inside tips about Dell and Nvidia Corp.
Chiasson received a 6.5-year sentence, and Newman received a 4.5-year term last year.
Both men argued on appeal that the jury had no basis to convict them, and that U.S. District Judge Richard Sullivan had botched the jury's instructions.
Sullivan declined to instruct the jury that prosecutors needed to show that Chiasson and Newman hoped to personally benefit from their tips.
A three-judge panel of the 2nd Circuit agreed Wednesday that this burden belongs to the prosecutors.
"We agree that the jury instruction was erroneous because we conclude that, 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," Judge Barrington Parker wrote for the panel (emphasis in original).
The judges also found the evidence against the men "insufficient."
"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," the opinion states.
Judges Ralph Winter and Peter Hall joined the decision.
Mark Pomerantz, Chiasson's attorney with Paul, Weiss, Rifkind, Wharton & Garrison, said his client "has long maintained that he did not commit any crimes."
"It is gratifying that the court ultimately agreed, and in doing so restored some substance and logic to the law of insider trading," Pomerantz added in a statement.
Newman's lawyer did not immediately respond to a request for comment.
Whether the former managers are in the clear now remains uncertain.
U.S. Attorney Preet Bharara indicated that an appeal may be imminent.
"Today's decision by the Court of Appeals interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information," Bharara said in a statement. "The decision affects only a subset of our recent cases, and in those cases - as in all our criminal cases - we investigated and prosecuted misconduct based on our good faith assessment and understanding of the facts and the law that existed at the time. We are still assessing the court's decision, which appears in our view to narrow what has constituted illegal insider trading, and are considering our options for further appellate review."
Pace Law School professor Bennett Gershman, a former Manhattan prosecutor, predicted in a phone interview that any government appeal would have no legs.
"I don't think they have a chance," he said.
The requirement that prosecutors prove mens rea, or guilty mind, is common to all criminal law, Gershman noted.
"It kind of puts the kind of burden on prosecutors that any case puts on prosecutors," Gershman said. "They just have to do their job. We're not talking about something far removed from their daily investigations and prosecutions."
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