Wednesday, April 23, 2014 10:46:27 AM
imo CRAZY LEGAL FINE POINT (IT'S NOT INSIDER IF SOME ONE IN THE LEAKER CHAIN DOES NOT DERIVE A PERSONAL BENEFIT)
NYT Appeal Judges Hint at Doubts in Insider Case
By BEN PROTESS and MATTHEW GOLDSTEIN
A panel signaled it might overturn the convictions of two former traders, which would represent a crack in a campaign by Preet Bharara, the U.S. attorney in Manhattan, against insider trading at hedge funds.
Snip
The appeal by Mr. Chiasson and Mr. Newman, which could take months to decide, has captivated the white-collar bar. A victory for Mr. Chiasson and Mr. Newman would offer a blueprint for traders to defend future insider trading cases and would imperil at least one other milestone conviction: Michael Steinberg, of SAC Capital Advisors, the once-giant hedge fund that Mr. Bharara indicted last year. When Judge Sullivan presided over Mr. Steinberg’s trial late last year, he provided a jury instruction similar to the one for the trial involving Mr. Chiasson and Mr. Newman.
Unlike other judges, Judge Sullivan did not require jurors to conclude that Mr. Newman and Mr. Chiasson had known a critical detail when trading: that insiders were improperly leaking confidential information in exchange for some “personal benefit.” Judge Sullivan’s instructions, the defense lawyers contended, ran afoul of a 30-year-old United States Supreme Court ruling that helped define insider trading.
“Judge Sullivan left a piece out of the equation,” Mark F. Pomerantz, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison who argued the appeal for Mr. Chiasson, told the panel. Mr. Pomerantz, who is working alongside Alexandra Shapiro and Mr. Chaisson’s trial lawyer, Gregory Morvillo, likened the case to the government claiming that there was an egg salad sandwich without proving that there were any eggs.
The argument appeared to strike a chord with the judges, whose persistent questioning of Ms. Apps contrasted with their scant interruptions of Mr. Chiasson’s and Mr. Newman’s lawyers. When the hearing ended, lawyers filed out of the courtroom buzzing about the prospect of the panel overturning the convictions.
But the appeal before the panel, which also included Judge Peter W. Hall, is hardly a foregone conclusion. It is unclear whether the United States Court of Appeals for the Second Circuit, a court known for siding with the government, will take the rare step of narrowing what constitutes insider trading. A panel’s questioning in oral arguments does not always foreshadow the ruling.
To sow some doubt about the appeal, Ms. Apps pointed in the oral arguments to other cases that support Judge Sullivan’s jury instruction. And even if the appellate court takes issue with the technicalities of the instruction, Ms. Apps said, the error was “harmless,” given the overwhelming weight of evidence presented at trial that Mr. Chiasson and Mr. Newman knowingly traded on confidential information.
After a five-week trial in late 2012, a jury convicted Mr. Newman and Mr. Chiasson of participating in what prosecutors called a “circle of greed” that generated roughly $70 million in illicit gains. Judge Sullivan sentenced Mr. Newman, 49, to four and a half years in prison, while Mr. Chiasson, 40, received a six-and-a-half-year sentence. The appellate court allowed both defendants to remain free on bail while awaiting the outcome of their appeal.
Like Mr. Steinberg at SAC Capital, Mr. Newman and Mr. Chiasson were far removed from insider leaks at two technology companies, Dell and Nvidia. Prosecutors placed them at the end of a four- or five-person chain of information that started with insiders at Dell and Nvidia and wound its way through a network of traders.
At Dell, the leaks came from Rob Ray, an employee in the computer maker’s investor relations department. Mr. Ray shared advance earnings information with a former colleague, Sandeep Goyal, who in turn passed the tips on to two analysts who worked with Mr. Chiasson and Mr. Newman at their respective hedge funds, Level Global Investors and Diamondback Capital Management. Mr. Goyal and the analysts — who socialized in Manhattan and the Hamptons — later pleaded guilty and cooperated with the government.
Prosecutors never charged Mr. Ray, although insider trading cases require proof that someone like him wrongfully disclosed secret information in a breach of a duty to his company. Stephen Fishbein, a partner at Shearman & Sterling who is representing Mr. Newman, theorized that Mr. Ray was not charged “because there is not sufficient evidence of a breach or a benefit.”
The appeal also hinges on what the Supreme Court intended in a 1983 ruling, Dirks v. the Securities and Exchange Commission, that said a person could be guilty of insider trading only if he knew that the corporate insider leaking the information was breaching a duty to the company. When defining a breach, the court explained that “the test is whether the insider personally will benefit,” adding, “Absent some personal gain, there has been no breach of duty.”
For Mr. Ray, the gain was subtle: career advice from Mr. Goyal.
At the hearing, defense lawyers argued that Judge Sullivan’s instructions had tainted the verdict because he permitted the jurors to convict Mr. Chiasson and Mr. Newman without finding that the men knew of any quid pro quo. Mr. Newman and Mr. Chiasson were unaware that Mr. Ray received career advice from Mr. Goyal.
The argument gained traction among defense lawyers. Before the hearing on Tuesday, the National Association of Criminal Defense Lawyers filed a supporting legal brief warning that the convictions would have a chilling effect on Wall Street analysts gathering information.
The appellate judges seized on the vague nature of what constituted a personal benefit. Judge Parker questioned the “amorphous theory” underpinning some of the government’s case, noting that an air of uncertainty hung over Wall Street without a “bright line” to clarify what constituted illegal trading.
http://dealbook.nytimes.com/2014/04/22/appeals-court-raises-doubts-about-governments-insider-trading-case/?_php=true&_type=blogs&emc=edit_th_20140423&nl=todaysheadlines&nlid=30954936&_r=0
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