The U.S. Supreme Court denied the government’s petition for a writ of certiorari in a major securities fraud case last fall. Prosecutors were appealing a federal appellate court ruling that had not only reversed the defendants’ convictions but also dismissed the indictments filed against them. United States v. Newman, 773 F.3d 438 (2d Cir. 2014). The case initially seemed like a big win for federal prosecutors, who had accused two hedge fund portfolio managers of insider trading. The U.S. Attorney’s Office in New York has made prosecution of insider trading a priority. The Second Circuit’s decision, and the Supreme Court’s decision not to review it, affirms an important limitation on liability for alleged insider trading.
The Securities and Exchange Commission (SEC) generally defines the illegal type of “insider trading” as trading securities, particularly corporate stocks, based on “material, nonpublic information about the security.” 17 C.F.R. § 240.10b5-1. It is not a distinct criminal offense under federal law but instead is based on various interpretations of the offense of securities fraud. Laws and regulations relating to insider trading are found in §§ 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78ff; and SEC Rules 10b-5 and 10b5-2, 17 C.F.R. §§ 240.10b-5, 240.10b5-2.
Certain types of trades would seem to fit the SEC’s definition clearly. A corporate officer, for example, who possesses confidential information about the corporation’s financial status, would commit illegal insider trading if they traded their own corporation’s stock based on that information. This breaches the officer’s fiduciary duty to the corporation and is generally considered fraudulent. Trades based on “tips” from insiders, however, present a more complicated picture. The Supreme Court has held that “tippees”—i.e., people who receive insider tips and trade based on that information—are not liable for insider trading unless the tipper received some “personal benefit” for the tip. Dirks v. SEC, 463 U.S. 646, 667 (1983).
The Newman case began when the FBI raided two hedge fund offices in November 2010. Prosecutors charged seven people, including the two defendants, with securities fraud in January 2012, alleging that they illegally traded tech company stocks based on information—or “tips”—from insiders at Dell and Nvidia. The other five people entered plea agreements, and a jury convicted the two defendants in December 2012. The following May, a judge sentenced them to 54 months and 78 months in prison. The Second Circuit granted their request to remain free while their appeal was pending.
The defendants argued on appeal that the evidence regarding several elements of the charged offense was insufficient, particularly the requirement of proof that a tipper received a personal benefit. They further argued that the trial court erred by not instructing the jury that “it must find that a tippee knew that the insider disclosed confidential information in exchange for a personal benefit.” Newman, 773 F.3d at 442. The court agreed, finding that a jury could not have reasonably found that the defendants “knew, or deliberately avoided knowing, that the information originated with corporate insiders.” Id. at 455. It went further than reversing the defendants’ convictions, directing the district court to “dismiss the indictment [against the defendants] with prejudice.” Id.
These blog posts are meant to be illustrative only. Unless expressly stated to the contrary herein, these matters are not the result of any legal work of Michael J. Brown, but are used to communicate a particular point of view. Michael J. Brown does not claim credit for any legal work done by any lawyer or law firm either generally or specifically, with respect to the matters contained in this blog.
Michael J. Brown, a board-certified white-collar crime lawyer, has defended people against criminal charges in west Texas state and federal courts for more than 20 years. Contact us online or at (432) 687-5157 today to schedule a confidential consultation with a member of our team.
More Blog Posts:
U.S. Department of Justice Issues New Policies for Prosecution of White-Collar Criminal Offenses, Texas Criminal Lawyer Blog, January 22, 2016
How Clearing One’s Browser History Might Be a Federal Crime, Texas Criminal Lawyer Blog, January 6, 2016
SEC Rejects Constitutional Challenge in Securities Fraud Case, Texas Criminal Lawyer Blog, December 23, 2015
Photo credit: Thomas J. O’Halloran, photographer [Public domain], via Wikimedia Commons.