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2nd Cir. Won't Revisit Insider Trading Ruling

By Casey C. Sullivan, Esq. on April 07, 2015 | Last updated on March 21, 2019

Inside traders can breathe a sigh of relief today. The Second Circuit has refused to revisit a ruling which federal prosecutors had said would severely limit their ability to pursue insider trading cases.

Prosecutors had asked the Second Circuit Court of Appeals to rehear the case of hedge fund managers Todd Newman and Anthony Chiasson. The court had reversed the pair's convictions on insider trading charges last December.

Newman to the Supreme Court?

The Second Circuit refused the Department of Justice's request to reconsider its ruling in United States v. Newman. That holding makes insider trading harder to prove and jeopardizes existing prosecutions, DOJ argued. Newman focused on what constitutes a "benefit" an inside source receives in exchange for inside information. In Newman, the Second Circuit held that, while "simple friendship" may be one of life's great pleasures, it's not enough to be considered a benefit under insider trading laws. Prosecutors must now show a "meaningfully close personal relationship" which results in a consequential gain of value.

DOJ has 90 days to file a petition for cert. with the Supreme Court and is currently considering its options, according to The New York Times. An appeal to SCOTUS could be risky, given the Court's aversion to expanding white-collar crimes. If there's no petition, prosecutors may ask Congress to act or simply base future prosecutions on the new standard.

A Ruling with Weight

The Second Circuit's rulings on securities law are particularly important. The circuit is the home of Wall Street and sees the vast majority of insider trading prosecutions. Changes to the case law interpreting SEC rules and regulations have much greater effects than other circuits' interpretations.

The opinion is already having direct impacts. Guilty pleas entered into prior to Newman have been reversed, including those of four men who plead guilty to insider trading with IBM stock. Raj Gupta, the ex-Goldman Sachs director convicted of passing inside information to his hedge fund friend Raj Rajaratnam, is currently arguing that his conviction must be set aside under Newman.

If the ruling stands, federal prosecutors, some of whom have made their careers through insider trading cases, may have to reassess their docket -- something that could make well-connected traders very happy.

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