Jackson Ross PLLC

Insider Traders​ and Tippers

My brother-in-law works for an investment bank and he tells me a court recently decided it’s now okay for me to give him “tips” regarding potential deals involving my company. I’m not sure I believe him. Does he know what he’s talking about?

Not really, but it’s true there was a very important case decided last December in the U.S. Court of Appeals for the Second Circuit which made it more difficult for federal prosecutors to convict people for insider trading who are two degrees or more removed from the person with the inside information. In the case of U.S. v. Newman, the court vacated the convictions of Todd Newman, portfolio manager of the Diamondback Capital hedge fund, and Anthony Chiasson, the co-founder of the Level Global hedge fund, ruling the government presented “no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.”

Newman’s central holding is that, in a criminal insider trading case, the government must prove the defendant “knew, or deliberately avoided knowing,” that a company insider’s improper disclosure of confidential information was made in exchange for a “personal benefit” to that insider. The court also held that the personal benefit to the insider cannot simply be vague goodwill, but must be of some consequence.

The Newman decision has already led to the reversal of several prior convictions and guilty pleas, and will make it harder in the future for the government to prove insider trading against “tippees” and, in particular, “remote tippees” who do not deal directly with the original source of the information.

Your brother-in-law should be forewarned that the Newman case had an odd fact pattern, one that resulted in the remote tippees being prosecuted, but not the insiders who actually committed the breach of confidentiality. Note also that while the individuals were ultimately cleared—assuming the U.S. Supreme Court does not overturn the Second Circuit—both of their hedge funds had to close due to investor redemptions. Please contact me today at Gary.Ross@JacksonRossLaw.com for detailed advice regarding your situation.