SCOTUS Review Sought |on Insider Trading Ruling

(CN) - The federal government asked the Supreme Court to review a Second Circuit ruling that dramatically narrowed the definition of insider trading and let a hedge fund founder off the hook for $68 million in insider trades.

In April, a three-judge Second Circuit panel denied a request from Manhattan U.S. Attorney Prett Bharara to reconsider its earlier ruling that dramatically narrowed the definition of insider trading.

That decision freed Anthony Chiasson, who co-founded the hedge fund Level Global Investors, and Todd Newman, an ex-portfolio manager of Diamondback Capital Management, who were convicted two years ago of committing securities fraud.

Currently, there is no federal law that specifically defines insider trading. In the absence of such a definition, courts and regulators have enjoyed a wide latitude in defining it for themselves, the result being a sometimes confusing morass of regulations and court rulings.

In dismissing the insider trading charges against Chiasson and Newman last December, the Second Circuit ruled the men needed to know that insiders at technology companies were improperly leaking confidential information to them to gain some personal benefit from their knowledge.

Solicitor General Donald Verrilli asked the Supreme Court to review the case Thursday.

"In an unprecedented ruling, the court of appeals broke with this Court's decision in Dirks v. SEC. The court reinterpreted this Court's holding that an insider personally benefits when he 'makes a gift of confidential information to a trading relative or friend,' to require 'proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,'" Verrilli said. "That holding cannot be reconciled with Dirks, which did not require an 'exchange' to find liability for a gift of inside information and did not impose amorphous standards for the relationships that can support liability."

The Solicitor General asserts that the Second Circuit's decision creates a conflict with the Ninth and Seventh Circuits, which will result in the uneven application of securities laws across jurisdictions unless the Supreme Court decides the matter.

The Second Circuit's holding not only hurts investors, but undermines the activities of market analysts who play by the rules and work hard to conduct a thorough analysis of a company's stock, Verrilli argued.

"If certain analysts sidestep that labor by siphoning secret information from insiders in breach of their duties, thereby arriving at 'predictions' of corporate performance that no model can equal, then other analysts will be discouraged from doing the work that is necessary for the markets to function effectively," Bharara said.

At a six-week trial, prosecutors portrayed Chiasson and Newman 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.

In 2013, Chiasson received a 6 1/2-year sentence for his activities, and Newman received a 4 1/2-year sentence.

In reversing their convictions, the Second Circuit found that the men were "several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information."

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