A three-judge panel of the U.S. Court of Appeals for the Second Circuit recently heard arguments on whether to reverse the convictions of two hedge fund managers.
Todd Newman, a portfolio manager at Diamondback Capital Management, and Anthony Chiasson, a co-founder of Level Global Investors, were convicted of insider trading. The two hedge fund managers made millions of dollars trading on inside information in Dell Computer and Nvidia. They knew that the information came from company employees who breached their obligations to their employers in exchange for “things of value.”
The managers’ attorney described them as “remote tippees,” meaning they did not receive the information from the original sources. However, the evidence showed they wanted assurance that the tips came from insiders in a position to provide reliable information. The tips proved to be worthwhile, as demonstrated by the shares moving when the information became public.
Newman and Chiasson’s appeal was based on the fact that the federal district court judge refused 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 appellate panel focused on the Supreme Court holdings 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.
Judge Barrington D. Parker promoted the need for a “bright line” to enable hedge fund managers to know whether they were violating the law when they traded on inside information. In other words, proving the information came from an insider and the trader was aware of the source will be irrelevant if the trader did not know about the payoff.
This leads to the question of why a hedge fund manager would ever want to know about the payoff? As long as the tip is reliable, the rest doesn’t matter to him/her. Additionally, the standard for meeting the “something of value” requirement is extremely low. Even friendship has been deemed sufficient.
In short, if the court overturns the convictions of Mr. Newman and Mr. Chiasson, it will make it difficult for prosecutors to ever win convictions. The message to traders will be to never discuss or be aware of the payoffs to sources.
If you have any questions about insider trading or would like to discussother corporate, securities and investment banking matters, please contact me or the Scarinci Hollenbeck attorney with whom you work.
Section 363 Sales in Bankruptcy: What Businesses, Lenders, and Buyers Need to Know
When a company enters Chapter 11 bankruptcy, many assume the process will culminate in a lengthy reorganization plan. However, distressed businesses are increasingly being sold through a different mechanism — a sale under Section 363 of the United States Bankruptcy Code. A Section 363 sale allows a company, as a debtor-in-possession in bankruptcy, to sell […]
Zoning Laws Explained: What You Need to Know Before Buying Property
Before buying property, it is critical to determine whether local zoning laws may affect your plans. If you plan to redevelop the property, you will want to confirm that local zoning regulations permit development as intended. If acquiring property that is already developed, you must verify that the use is permitted in the underlying zoning […]
Special Needs Trusts in New Jersey: Planning for Your Loved One’s Future
For parents of a child with a disability, estate planning raises concerns that go well beyond deciding who will inherit their assets. Parents may spend years making sure their child has the right care, services, and support. Eventually, they must also confront a difficult question: Who will take over when they can no longer do […]
What Every Real Estate Investor Should Know Before Buying a Rental Property
Before buying a New Jersey rental property, an investor should verify realistic operating numbers, the property’s legal and regulatory status, lead-based paint and flood compliance, the existing leases and tenant protections, and the right ownership structure. A rental property is more than a piece of real estate; it is an operating business subject to legal, […]
Can You Change an Irrevocable Trust in New Jersey?
In New Jersey, an irrevocable trust can sometimes be modified even though its name suggests otherwise, and one of the primary tools for doing so is a process called decanting. Whether decanting is available depends on the specific terms of the trust and the discretion given to the trustee. Key takeaways: New Jersey has no […]
How Intellectual Property Valuation Will Impact Business Transactions
Intellectual property valuation determines the monetary value of a business’s IP assets, and it drives outcomes in licensing deals, joint ventures, mergers and acquisitions, financing, and ownership disputes. The most valuable assets of a business are often the things that cannot be seen or touched: a proprietary process, a copyrighted work, brand recognition, or the […]
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!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
