Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

Second Circuit’s Game-Changing Insider Trading Decision Stands

Author: Dan Brecher

Date: April 10, 2015

Key Contacts

Back

The United States Court of Appeals for the Second Circuit will not reconsider its decision in United States v. Newman, which dramatically increased the difficulty of proving insider trading cases involving “remote tippees” who lack a direct relationship with the individual who disclosed the confidential information.

The appeals court recently denied the Justice Department’s request to reconsider its ruling.

Second Circuit Insider Trading
Photo by Bill Oxford on Unsplash

The Second Circuit’s Decision

As previously discussed on the Scarinci Hollenbeck Business News Blog, the Second Circuit vacated the insider trading convictions of Todd Newman, a portfolio manager at Diamondback Capital Management, and Anthony Chiasson, a co-founder of Level Global Investors. On appeal, the two men argued that the district court erred in failing to instruct the jury that they could not be convicted unless they knew the employees leaking the information had received a benefit when they violated their duty to their companies by providing the information.

The Second Circuit agreed, ruling that in order to sustain a conviction for insider trading, the prosecution 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. With regard to establishing a personal benefit, the appeals court further ruled that the prosecution must provide “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.”

What’s Next for Insider Trading Prosecution?

The Newman decision is a serious blow to the federal government’s efforts to crack down on insider trading, particularly for Southern District U.S. Attorney Preet Bharara, who has secured a number of high-profile convictions that could be threatened by the ruling. Michael Steinberg, of SAC Capital Advisors, is appealing his conviction, which was based on the same jury instruction. Rajat K. Gupta, who famously provided inside information to Raj Rajaratnam, and Matthew Martoma, another SAC trader, have also sought to overturn their convictions.

To preserve the convictions, the federal government could file a further appeal with the U.S. Supreme Court. However, in reaching its decision, the Second Circuit relied on the Supreme Court’s decision thirty years ago in Dirks v. SEC, which established that trading on inside information is legal unless it is obtained from an individual who violates a duty to keep it confidential and receives something of value in return for the information. So unless the Justices are willing to reconsider that precedent, they are unlikely to grant review.

The Court has also shown an unwillingness to sanction attempts by federal prosecutors to “creatively” widen the scope of criminal liability for business misdeeds. In Yates v. United States, the justices held that a Florida fisherman did not violate the Sarbanes-Oxley Act’s anti-shredding provision when he tossed undersize fish overboard in order avoid a fine from wildlife officials, rejecting the government’s argument that the statute generally prohibited the spoliation of evidence and broadly included all physical items that might be relevant to any matter under federal investigation.

Lastly, federal lawmakers are also considering several new bills that would address the Newman decision, including one that would expressly define the crime of insider trading. However, given the current state of Congress, the likelihood that any of these bills will ever become law is uncertain.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
How to Conduct a Fair and Legal Employee Termination in 2025 post image

How to Conduct a Fair and Legal Employee Termination in 2025

Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]

Author: Angela A. Turiano

Link to post with title - "How to Conduct a Fair and Legal Employee Termination in 2025"
Admin Dissolution for Annual Report: What You Need to Know post image

Admin Dissolution for Annual Report: What You Need to Know

While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]

Author: Dan Brecher

Link to post with title - "Admin Dissolution for Annual Report: What You Need to Know"
What Is Antitrust Litigation Law? post image

What Is Antitrust Litigation Law?

Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]

Author: Robert E. Levy

Link to post with title - "What Is Antitrust Litigation Law?"
Dissolving Your Business: Essential Legal Steps to Protect Your Interests post image

Dissolving Your Business: Essential Legal Steps to Protect Your Interests

If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]

Author: Christopher D. Warren

Link to post with title - "Dissolving Your Business: Essential Legal Steps to Protect Your Interests"
The Role of Corporate Restructuring in Mergers & Acquisitions post image

The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]

Author: Dan Brecher

Link to post with title - "The Role of Corporate Restructuring in Mergers & Acquisitions"
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public post image

Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public

Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]

Author: Bryce S. Robins

Link to post with title - "Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!