The US Court of Appeals for the Second Circuit in United States v. Newman, 13-1837 (2d Cir. Dec. 10, 2014), vacated the convictions of two former hedge fund managers, Todd Newman and Anthony Chiasson, on insider trading charges. The Second Circuit held that the trial court's jury instructions were erroneous because the judge did not instruct the jury that, in order to sustain a conviction for insider trading, the government must prove beyond a reasonable doubt that a tippee who trades on inside information knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.
Furthermore, the court found that the evidence at trial was insufficient to support the convictions for two reasons. First, there was insufficient evidence that the alleged insiders received a personal benefit. Second, there was no evidence that the defendants knew they were trading on information disclosed by insiders in violation of their fiduciary duties.
This decision will make it difficult for the authorities to charge "downstream tippees" – traders who do not have a direct connection with the alleged insider who discloses material non-public information. It will therefore limit the range of defendants who can be charged with insider trading and is a setback for the US authorities. Click here to read our briefing by John O'Donnell and Scott Balber in New York.
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