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.
What Business Owners Get Wrong Before Meeting a Litigation Attorney
What should you expect when meeting a litigation attorney about a business dispute? You should expect to describe the dispute in your own words, hand over the most important documents, flag any deadlines or immediate threats, and leave with a clearer picture of the problem, what information is still needed, and the likely next steps. […]
Arbitration vs. Litigation vs. Mediation: What New Jersey Businesses Should Know Before Signing a Contract
Arbitration resolves disputes privately before an arbitrator whose decision is usually final, while litigation resolves them in court with full rights of appeal. Whether a business ends up in arbitration or litigation is often decided when it signs the contract, long before any dispute arises. Key Takeaways When facing a contract dispute, carefully consider your […]
Can You Own Part of a New Jersey Business Without a Written Agreement?
Can you own part of a business in New Jersey without a written agreement? Yes, it is possible. Under New Jersey’s Uniform Partnership Act, a partnership can arise when two or more people carry on a business as co-owners for profit, whether or not they ever intended to form one. Ownership doesn’t necessarily depend on […]
Crisis-Proofing Your New Jersey Business: Building a Crisis Response Plan Before You Need One
For New Jersey businesses, crisis preparedness should be viewed as a legal and operational function, not simply an emergency-management exercise. A well-designed crisis response plan can help preserve evidence, protect confidential communications, meet reporting obligations, limit unnecessary exposure, and prevent an already difficult situation from becoming a larger legal problem. Key Takeaways A serious crisis […]
Monmouth County's Next Development Wave: What Developers and Investors Need to Know
Monmouth County is entering a significant new phase of development. For those looking to acquire property or undertake a new project, understanding the market opportunity is only the beginning. The more important question is whether a particular property can actually be developed as contemplated and what approvals, agreements, and other conditions will be required to […]
Are Your Conversations with AI Shielded from Discovery? Courts Are Split
Whether a client’s prompts to a generative AI tool and the documents it produces are protected from disclosure depends on the case type, who claims protection, and whether counsel was involved. In United States v. Heppner, a New York federal judge ruled that a criminal defendant’s communications with an AI platform were protected by neither […]
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!
