Christopher M. Matthews reports for WSJ's Law Blog:
A panel of federal appeals-court judges signaled that prosecutors may have taken too broad a view of insider trading, saying there needs to be more a “bright line” for Wall Street about what constitutes a crime.
The comments came Tuesday during arguments of an appeal brought by two former hedge-fund managers that could threaten some of the convictions won by prosecutors in their yearslong crackdown on insider trading.
At issue is whether a trader, to be guilty of insider trading, must have known a tip had been illegally disclosed in exchange for a reward.
Prosecutors have argued they need only show that people who used insider information knew it had been disclosed in breach of a fiduciary duty.
Two members of the three-judge panel of the U.S. Court of Appeals for the Second Circuit in Manhattan expressed concern that prosecutors’ approach is too vague.
“We sit in the financial capital of the world, and the amorphous theory you have gives precious little guidance to all these financial institutions and all these hedge funds out there about a bright-line theory as to what they can and cannot do,” Judge Barrington Parker said.
The appeal is being pursued by Todd Newman and Anthony Chiasson, two portfolio managers convicted in 2012 of participating in a $72 million insider-trading scheme. The two men, free on bail pending the appeal, are seeking to have their convictions overturned.
The original trial judge told jurors that Messrs. Chiasson and Newman could be convicted of insider trading if they knew there had been a breach of duty, but didn’t instruct them that the defendants had to have known that the person who leaked the information had done so in return for a “personal benefit.”
Lawyers for Messrs. Newman and Chiasson said Tuesday that prosecutors must show their clients knew the tippers were somehow compensated for the tips. Therefore, they said, the judge’s instruction was erroneous.
The tips in question made their way through a network of analysts before reaching analysts who worked for Messrs. Chiasson and Newman, the lawyers said. Their clients didn’t seek out or knowingly use inside information, they said.
Assistant U.S. Attorney Antonia Apps said Tuesday that even if the judge’s instruction was erroneous—and she didn’t believe it was—the jury would have concluded the two men inferred the information was given in exchange for a reward.
She said the “bright line” on what constitutes insider trading has been clear for decades.
If the court sides with Mr. Chiasson, who founded Level Global Investors, and Mr. Newman, once a Diamondback Capital portfolio manager, the two will either be granted a new trial or a judgment of acquittal. The appeals panel didn’t issue a decision Tuesday.