A federal appellate court issued a ruling at the end of 2014 that could have a far-reaching impact on criminal prosecutions in the financial sector. The court overturned the convictions of two hedge fund portfolio managers for insider trading, finding that the government failed to establish several key elements at trial. United States v. Newman, et al, Nos. 13-1837-cr (L), 13-1917-cr (con), slip op. (2d Cir., Dec. 10, 2014). The federal criminal offense of insider trading, the court held, requires proof beyond a reasonable doubt that a tippee (1) knowingly received confidential information from an insider and (2) knew that the insider received a personal benefit in exchange for the disclosure. The court found that prosecutors failed to prove either element with regard to the defendants.
The term “insider trading” generally refers to trading securities, such as corporate stocks and bonds, based on information that is not available to the general public. It does not always describe illegal activity, since corporate officers and other insiders may legally trade their own securities, provided they report those trades to the Securities and Exchange Commission (SEC). Illegal insider trading, according to the SEC’s definition, involves the use of information obtained in violation of an insider’s fiduciary duty to keep that information confidential. The burden of proof on the government is quite high in these cases.
In Newman, prosecutors alleged that insiders at the technology companies Dell and NVIDIA disclosed confidential information to a group of financial analysts in 2008, before either company released the information in its periodic earnings announcements. The analysts passed the information on to their portfolio managers, including the two defendants, who executed trades in the companies’ stock that yielded profits of about $4 million and $68 million for the defendants’ funds.
Prosecutors charged the defendants with securities fraud in violation of Sections 10(b) and 32 of the Securities and Exchange Act of 1934 and SEC Rules 10b-5 and 10b5-2, 15 U.S.C. §§ 78j(b), 78ff, 17 C.F.R. §§ 240.10b-5, 240.10b5-2; and conspiracy to commit securities fraud, 18 U.S.C. § 371. After six weeks of trial, and after the court reserved decision on the defendants’ Rule 29 motion for a judgment of acquittal, a jury convicted both defendants on all counts. The court sentenced them to prison terms of 54 months and 78 months.
On appeal, the defendants argued that the trial court’s jury instructions were erroneous. The trial court instructed the jury that, in order to find the defendants guilty, they had to find that the government proved beyond a reasonable doubt that the insiders at Dell and NVIDIA intentionally breached a fiduciary duty for personal benefit, and that the defendants knew about the breach. It did not, however, instruct the jury that it had to find that the government proved that the defendants knew about the personal benefit to the insiders.
The appellate court held that this was error, and that the defendant’s knowledge of the insider’s benefit is a required element of the offense. It further found that the government failed to produce enough evidence to prove that the defendants knew about any breach of fiduciary duty, let alone any benefit to the insiders.
Board-certified criminal defense attorney Michael J. Brown represents west Texas defendants in state and federal cases involving white-collar and drug offenses. To schedule a confidential consultation with an experienced and skilled advocate, contact us today online or at (432) 687-5157.
More Blog Posts:
Commodities Trader Charged in First Federal Case to Allege Use of High-Frequency Trading to Manipulate Market, Texas Criminal Lawyer Blog, February 19, 2015
Theft and Misuse of Computer Data Are Becoming Major Areas of Cybercrime Prosecutions, Texas Criminal Lawyer Blog, December 17, 2014
Firearms Distributor Indicted for Mail and Wire Fraud for Alleged Bribes, Kickbacks, Texas Criminal Lawyer Blog, September 26, 2014
Photo credit: By Eva K. (Eva K.) [FAL or CC BY-SA 2.5], via Wikimedia Commons.